Roth IRA Excess Contribution Penalty 2021

[LostTaxPayer]

Hello,

In tax year 2021, I contributed $6,000 to my Roth IRA. I found later the IRS rules stating my AGI was too high, and was therefore not eligible to make any 2021 contribution to my Roth IRA. My age is under 59 1/2 years. TurboTax flagged the $6,000 excess contribution.

I called my bank and withdrew the excess contribution ($6,000) plus bank calculated earnings ($477.49) in calendar year 2022, prior to the April tax filing deadline.

I eventually filed an extension because I needed more time figuring how to express the withdrawal in TurboTax desktop edition. I combed threads on this board and found @DanaB27's answer on creating a 1099-R (I don't have the actual 1099-R form because the bank won't provide it to me until January 2023). Therefore I did the following:

1. Created a 1099-R form
2. Entered $6,000 in box 1
3. Entered $477.49 in box 2a.
4. Entered codes J and P in box 7
5. Selected 2022 in response to "which year on form 1099-R"

It is my understanding that I am only obligated to pay a 10% penalty on the earnings ($477.49), which comes out to $48. However, I see TurboTax is also calculating that I owe 6% on the excess contribution of $6,000, which comes to $360.

To make matters more perplexing, TurboTax prompted for my Roth IRA value on December 31, 2021. Upon entering it, TurboTax calculated the aforementioned $360 penalty on form 5329. If I enter $0 instead, then it calculates a "$0" penalty. I thought I wasn't even obligated to enter any info on form 5498 in TurboTax.

So, I have multiple questions:

1. Did I enter my 1099-R correctly?

2. I thought that because I withdrew the $6,000 excess contribution ahead of the 2021 filing deadline that I am not subject to this 6% penalty of $360. Is this not the case?

3. Why does TurboTax calculate the $360 penalty when I provide my Roth's year end balance? Does the IRS require I provide the year end value?

[dmertz]

1.  No.  Box 1 should contain $6,477.49.  The rest is correct.

2.   You are correct.

3.  To avoid TurboTax indicating an excess contribution penalty you must revisit the Roth IRA contribution section.  After entering the $6,000 Roth IRA contribution and TurboTax indicates that you have a $6,000 excess contribution you must enter $6,000 when asked for the amount of Contribution Withdrawn Before Due Date of your Return.  Doing so will cause TurboTax to treat the $6,000 as having never been contributed.

[LostTaxPayer]

Thanks @dmertz. I mistakenly stated in the OP that I entered $6,000 in box 1 of the 1099-R. In fact, I entered $6477.49 in box 1 from the start.

Please review my responses when revisiting the Roth IRA contributions section, as I answer the following:

"Enter your total Roth IRA contributions for 2021, even if you transferred, or "recharacterized," some or all of it to a traditional IRA"
Your Roth Contribution: 6,000.

"Would you like us to track your Roth IRA basis?

No

"Enter Excess Contributions"

Your Excess Roth IRA Contributions for Prior Years: 6,000
I originally answered 6,000 here, thinking "Prior Years" included 2021. If I enter 0, then the $360 penalty goes away. 2021 is the only year in which I made an excess contribution. Is this where I went wrong in TurboTax? This value should be 0 because the question is only asking about excess contributions in tax year 2020 and prior, not inclusive of 2021? Is that correct?

"How Much Excess to 2021?

Excess to Credit 2021 Roth IRA Contributions: 0

"Contributions Withdrawn Before the Due Date of Your Return: 6,000

Appreciate your help @dmertz! Thanks.

[dmertz · Accepted solution]

In 2021 TurboTax, excess contributions for prior years is referring to contributions for years prior to 2021.  Enter zero, not $6,000 if you had no excess contributions carried into 2021.  (This is one of the many areas in the retirement section of TurboTax where the writer of the instructions had a less than complete grasp of the possible scenarios, resulting in a misleading instruction.  Many people have similarly misunderstood this particular instruction the same as you originally did.)

[LostTaxPayer]

Problem solved. Thank you!