Removal of excess Roth IRA

[Anonymous]

In April, 2021 after I had filed my 2020 taxes, I made a Roth contribution of $7000 for the 2020 tax year.  I later realized that I was not entitled to the contribution, so in June, 2021, I had my broker reverse, i.e., withdraw the $7000 contribution.  The Broker has now sent me a 2021 Form 1099-R (Removal of excess 2020 contributions) showing a gross distribution and taxable amount of $7063.50, and Distribution codes JP.  How do I handle these transactions on my 2021 taxes. In particular, how do I avoid paying taxes on the $7000 withdrawal.

[FangxiaL · Accepted solution]

The $7,000 contribution to your Roth IRA account is after-tax dollars, so you don't pay tax on this amount. The $63.50 represents earnings, which is taxable on your 2020 tax return and subject to early distribution penalty if you are under 59 1/2. 

Here is what you need to do:

1. you need to go back and amend your 2020 to report the earnings because the earnings are included in the taxable income for the year the excess contribution was made (2020). See the link below if you need help to amend your 2020 return. Only enter $63.50 as earnings when entering information on your 2021 1099-R and let TurboTax know that it is a 2021 1099-R form.  
2. Ignore the 2021 Form 1099-R on your 2021 tax return if there is no federal or state income tax withheld. 

For help with amending your 2020 tax return, see this help article.

[Anonymous]

Hi Fangxial,

Thanks so much for your help. Your response made a lot of sense. However, forgive me if I am a bit dense (I am 76 years old), but it is not clear to me specifically how I should amend my 2020 return to add the $63.50 as earnings.  You state that I should "only enter $63.50 as earnings when entering information on your 2021 1099-R form."  Does this mean I should amend my 2020 return by adding a new 1099-R form (containing the 2021 1099-R form info)? 

[DianeW777 · Accepted solution]

When entering the information on the 2021 return you should see a code 'P' in Box 7 of your Form 1099R.  This shows the IRS that the earnings are taxable in 2020 and lets TurboTax know it's not taxable in 2021.

• P – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020

When you amend your 2020 return you will enter/add the Form 1099R as though you received it in 2020 and you will include only the $63.50 of earnings. For the 2020 return the code in Box 7 should be code '8'.

• 8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020

This will complete the returns correctly.

• How do I amend my 2020 return?