Taxes & Reporting on withdrawal of excess Roth Contributions for 2018 & 2019

[tmepfox]

1. I made a Roth contribution in in 2018 for $6500.  This year I realized I was only eligible for a partial contribution but removed the entire $6500.00 in June 2020.  While doing my taxes this year TurboTax reported the excess as $6060 (which after researching I calculated this to be correct). I have amended my 2018 return to pay the additional tax (haven’t filed it yet).
2. I also made a contribution for 2019 but realized I was ineligible so I removed the original $7000 + $559 earnings in June 2020

According to Vanguard I will receive a single 1099R next year which will have 2018 & 2019 withdrawals listed as separate line items with different codes for each in box 7.  According to Vanguard the codes would be JP for 2019 and just J for 2018 (not sure if this is correct for 2018).  

How do I report the multiple line items in the substitute 1099R as TT does not allow for this.

[macuser_22]

The $6,500 2018 contribution had to be returned no later then April 15, 2019 to avoid the 2018 6% penalty.  Since that was not done then you must file a 2018 5329 form reporting that penalty and pay the 6% penalty.

Since the 2018 excess also was not removed in the 2019 calendar year (before Dex 31, 2019), you must also file a 2019 5329 and pay another 6% penalty.

If finally removed in June 2020 then you should receive a 2020 1099-R next Jan 2021 with a code J in box 7 that will be reported on your 2020 tax return.   Because it will be a return of after-tax money then the 1099-R amount will not be taxable in 2020.

Your 2019 excess removed before the due date of the 2019 tax return.  The resulting 2020 1099-R for that should have a code JP in box 7.   The returned contribution will not be taxable but any earnings reported in box 2a will be taxable income in 2019.

You do not file any substitute 1099-R because the substitute is to correct an error and the 1099-R's that will be issued will be correct.  Both 1099-R's will be 2020 1099-R not 2019, although the code JP will require amending 2019 to report the earnings that are taxable in 2019.  To avoid amending 2019 when the 1099-R comes - see below:   (that is NOT a substitute 1099-R, but entered as a actual 1099-R the same as if you had it and are amending.)

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2019 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:

You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2020 1099-R into the 2020 tax return since the withholding is reported in the year that the tax was withheld. The 2020 code JP will not do anything in 2020 but the withholding will be applied to 2020.

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),

The earnings in box 2a,

Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2018 "

Enter code "J" in box 7 (Bottom).

On the "Which year" screen say that this is a 2020 1099-R. - That makes it taxable in 2019 and not 2018

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2020.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form.

[tmepfox]

Thanks @macuser_22   for the detailed explanation.  Please bear with me on some additional points of clarification.

1. Even though I removed the 2018 contribution of $6500.00 in June 2020, based on my AGI I was still eligible to contribute $440 (so $6060 excess). On 2018 & 2019 Form 5329 line 18 the, I should only put the excess contribution correct?  Even though I removed the entire $6500 I should not be taxed/penalized on the additional $440 removed, since I'm eligible to remove contributions anytime (I am under 59 1/2 and have had the account for > 5 years).

2. So only file a 1099R for the 2019 excess contribution and don't mention anything about the 2018 excess until filing 2020 return - correct? (makes sense since TT doesn't allow for multiple line entries for a single 1099R).

3. Before posting while trying different methods to report both 2018 and 2019 withdrawals, within Deductions & Credits I went through the interview for Traditional and IRA Contributions and while entering contributions for 2019, it asked if I had excess contributions for prior years for which I entered $6060 (2018).  TT generated a Form 5329 for 2019 listing both - the 2019 income ($559) on line 1 as well as the 2018 excess ($6060)  on line 18 and calculated the taxes due.   Do you think I should still file a 2018 5329 separately or is it OK to do the combined one generated by TT.

[macuser_22]

#1)  No.   Your 2018 & 2019 excess was $6,500.     An excess contribution penalty has nothing whatsoever to do with the normal tax on taking a distribution.    Age makes no difference.  What the 2018 & 2019 excess was has nothing to do with how much you are eligible to contribute in 2020.  The 6% penalty *repeats* each year that the excess remains.  It is a separate 6% penalty for 2018 & 2019.

If removed in 2020 then  that is a 2020 distribution and removing your own contribution is not taxable reguardless of age.

#2)  You file a 5329 form for 2018 & 2019, not a 1099-R.   The only 1099-R that you will receive will be for the 2020 distribution which is the total of all excess contributions reguardless of the year of contribution.  

Why do you have a 2019 1099-R?   You did not say that you were issued a 2019 1099-R.  What was removed in 2019?

#3)   You misunderstand.    It was not necessary to have the earnings returned at all because paying the 6% penalty allows the earnings to remain.

There should be nothing on line 1 of the 2019 5329 because the earnings were NOT removed in 2019, you removed that in 2020 so the earnings will be reported on your 2020 tax return and if you are over age 59 1/2 the earnings will not be subject to a penalty on a 2020 5329.

[tmepfox]

#2)  You file a 5329 form for 2018 & 2019, not a 1099-R.

You're right - my mistake, I meant 5329.

"Why do you have a 2019 1099-R?   You did not say that you were issued a 2019 1099-R.  What was removed in 2019?"

I didn't receive a 2019 1099-R - nothing was removed in 2019.  I apologize if my statements implied such.

I am still trying to understand your response to #1) below and may reach out to you if I have further questions.

Thanks for your help.

[macuser_22]

Re #1)  You cannot satisfy an excess for a tax year if the excess existed in the account as of Dec 31 of that tax year.  Your 2018 excess was $6,500 since that was still in you IRA at the end of 2018 and not removed by April 15 of 2019 which it was not.   Likewise for 2019.   The excess was in the IRA until finally removed in 2020.

Removing in 2020 is not retroactive apply  to earlier years, it simply stops current and future penalties.