Reporting excess Roth IRA Contribution

[CRL]

For tax year 2020 I contributed after-tax dollars to a Roth IRA account to later find out I was not eligible to make this contribution. To avoid the 6% I reached out to the brokerage company in 2021 and have already withdrawn the contributions along with the earnings on them. They informed me I would receive a 1099-R in 2022 that indicates this access contribution removal, but I should report the earnings as income on form 1040, and fill out form 5329 for my 2020 return. 

This leads me to a few questions:

1. Is the advice on what forms to complete correctly?
2. If the answer to 1 is "Yes", how can I achieve this using TurboTax Premier 2020 Desktop Version
3. Since I am under the age to make withdrawals I believe I owe a 10% penalty on the earnings. Where should this be reported?
4. Within the federal deductions & credits section, I see an option to report contributions to a Roth IRA. Should I complete this questionnaire even though they have been withdrawn, and will this ultimately complete form 5329 and other needed forms for me on the backend?

Thanks in advance for the help!

[DanaB27 · Accepted solution]

You will get a 1099-R 2021 in 2022 with codes P and J. This 1099-R will have to be included on your 2020 tax return and you have two options: 

• You can wait until you receive the 1099-R  2021 in 2022 and amend your 2020 return or
• You can report it now in your 2020 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 14 State withholding. Then you must enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code P will not do anything in 2021 tax return but the withholding will be applied to 2021.

To create a 1099-R in your 2020 return please follow the steps below:

1. Open your return
2. Click on the "Search" on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Select "I'll type it in myself"
5. Box 1 enter total distribution (contribution plus earning)
6. Box 2 enter the earnings
7. Box 7 enter P and J 
8. On the "Which year on Form 1099-R" screen say that this is a 2021 1099-R.

 Yes, you will have to pay the 10% penalty on the earnings. This will trigger Form 5329 in TurboTax.

Yes, enter the Roth contribution and withdrawal of excess contribution in the Deduction & Credit section.

1. Click on the "Search" on the top and type “IRA contributions”
2. Click on “Jump to IRA contributions"

[CRL]

Thank you so much for the help. I have gone through these steps and have a couple follow-up questions:

1. At the top of the 1099-R easy steps there is a place for Payer Name, Address, and Federal ID Number. Should this be left blank?
2. Selecting P notes "P-Return of contribution taxable in 2019". Should this say 2020?
3. Under the deductions easy steps tab, there is a question "Did you make a Roth contribution for 2020". If I go through the steps it asks me about excess contributions and withdrawals. Is this a form I should go through? I did it as a test, and it drastically lowered my Federal Refund amount.

Thanks again!

[DanaB27 · Accepted solution]

1) Try to get this information from your bank if possible.

2) No, just select the code P (Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 20XX/ prior year). Remember we are entering/creating a 2021 1099-R  and the code P on that form means "Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020".  You will indicate that it is a 2021 1099-R on the "Which year on Form 1099-R" screen.

3)Yes, enter your Roth contribution and the withdrawal under Deduction tab.

[archerry]

Can you provide these same instructions for a distribution that was a recharacterization from a Roth to a Traditional IRA?

[DanaB27]

You will enter the recharacterization when you enter the contribution to the Roth IRA

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions”
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.

@archerry

[SWJohnson]

My situation is similar to OP. I contributed $7000 to my Roth in May 2020. Turbotax tells me I exceeded AGI limit and can only contribute $5630 ($1370 excess). Just a few days to tax day so I went ahead and contributed same amount to my wife's Roth ($5630). Turbo tax was no help, but I figured out the earnings formula on the excess contribution ($431) and withdrew both from my account ($1801). Followed advice on this thread to generate a 1099-R for 2021, P & J codes. Now TT has increased my AGI meaning that $5630 was now $300 too high and now both accounts have excess contributions! This is creating a mess. Did I do something wrong?

[DanaB27]

No, you didn't do anything wrong the earnings are taxable income and it will increase your AGI. Therefore, it is best to remove a little extra from the excess to avoid this loop.

You might be able to recharacterize the new excess as a traditional IRA contribution, make it nondeductible and then convert it to the Roth IRA (backdoor Roth contribution). If you don't have any other deductible traditional IRAs then this conversion will be nontaxable (only earnings would be taxable). You will have to request with your bank to have the amount recharacterized. 

You will enter the recharacterization when you enter the contribution to the Roth IRA:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution
5. Enter the Roth contribution amount 
6. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
7. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
8. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible and you only get a screen saying $0 is deductible)

If you convert it to a Roth IRA in 2021 you will report this on your 2021 tax return:

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
5. On the "Your 1099-R Entries" screen click "continue"
6. Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
7. Answer the questions about the basis and value

Please see What happens if I made a ROTH IRA contribution but my modified adjusted gross income exceeds the lim... for additional information.

@SWJohnson

[SWJohnson]

Wow, the TT interview never hinted at how to correctly determine the true excess contribution. Your advice regarding recharacterizing had my head spinning. I went with option 2 in the link you provided to withdraw the additional funds. After the first withdrawal to correct the excess contribution, TT said I was still $300 over because the earning withdrawn raised my AGI. I was finally able to calculate that removing an additional $400 contribution + $121 earnings struck the correct balance of rising AGI (due to the earnings) and the resulting sinking contribution limit. For my wife's Roth, I had just sent in the original incorrect contribution limit (doh!), so simply withdrawing the additional $400 fixed that as there was no time to accrue any earnings on that money. God, I hope I got this right and the 1099-Rs I get next year closely match what I calculated and submitted now. Thanks for steering me in the right direction.

[hkpsport]

I followed these instructions but now turbo tax is charging me the 6% penalty on top of the 10% early withdrawal penalty.  Even though I corrected the mistake (Roth ineligible) of before my tax filing deadline.   Can you please validate the codes for box 7 of the 1099-R.  I'm believe I'm only required to pay the 10%.  Thanks

[epcot]

Hey friend! I have a followup question on this - my 1099 indicates 8J instead of PJ. Turbotax is calculating the 10% penalty on all withdrawals, not just the net income attributable - do you know how I can get it to figure the correct amount on just the earnings?

[DanaB27]

To clarify this was an excess contribution for 2020 that you removed in 2021 before the due date and you requested with your financial institution to have the excess contribution plus earnings removed.

If yes, then your 1099-R should have the code PJ in box 7. Box 1 should have the total distribution (excess contribution plus earnings) and box 2 should have only the earnings. Therefore, only the earnings should be taxable (shown on line 4b of Form 1040) and have a 10% penalty.

If it was a 2020 excess contribution removed in 2021 before the due date then, you might want to check with your financial institution why they issued the 1099-R with a different code.

@epcot

[epcot]

Ah maybe that’s my issue - it’s a 2021 Roth IRA excess contribution I removed in the same calendar year 2021.

I think I might be having a separate issue where the 1099 provider put the entire withdrawal amount in box 1 and 2a instead of just the earnings in 2a. They marked box 2b taxable amount not determined too, which is… confusing to say the least LOL

Thank you for your help!!

[Anonymous]

Hi there - I made an excess Roth IRA contribution in 2021, which I caught when starting to fill in my 2021 return in Jan 2022. I immediately contacted my financial institution and removed the excess. I had no earnings on the excess so they removed about $100 less than my over contribution amount. Do I submit a 1099-R for my 2021 return even though my financial institution says I won't receive it until Jan 2023? Since I have no earnings, do I still use codes P & J?

[LoganathanB]

Yes, you can use Code P in 1099-R and it will not be treated as income.

1. If you haven't filed your 2021 return yet, you can report it now and ignore the 1099-R you receive later (unless there's Box 4 Federal Tax withholding and/or Box 14 State withholding.).

Then you must enter 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. 

2. If you have already filed your 2021 return, you can wait until you receive 2022 1099-R in 2023 and amend your 2021 return.