Reporting IRA corrective withdrawal

[drezki17]

Hi,

I contributed by mistake money to a traditional IRA this year and I realized that I am not elligible and withdrew it. Now I received a from 1099R which shows the withdrawal amount and turbo tax thinks I should be paying taxes on the early withdrawal. What can I do?

[DanaB27]

Yes, the earnings shown in box 2a will be taxable income and subject to the 10% early withdrawal penalty if you are under 59 1/2.

To confirm, you requested the withdrawal of excess contributions for 2022 plus earnings and received it in 2022. The 2022 Form 1099-R should have codes 8 and 1 in box 7.

If you are over 59 1/2 then you can enter the amount of earnings under "Another reason" on the  "Did you use your IRA to pay for any of these expenses?" screen (in the follow-up questions after you entered all Form 1099-R).

[drezki17]

Yes, the form has codes 8 and 1 in box 7.

I'm not over 59 1/2.

Why are the earnings taxable? essentially I added  3k to the trad IRA, did not earn any return on them and then withdrew the 3k. The 3k is after-tax money. 

[DanaB27 · Accepted solution]

Only the earnings should be listed in box 2a as taxable. If you didn't have any earnings while the contribution was in the traditional IRA account then box 2a should be $0.

"You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions." (IRS)

"You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B." (IRS)

@drezki17 

[drezki17]

Does this mean there's an error on the form then> I should probably contact my IRA custodian.

[DanaB27 · Accepted solution]

Yes, there might be an error on your Form 1099-R. I would contact your custodian. You can show them this:

"For a distribution of contributions plus earnings from an IRA before the due date of the return under section 408(d) (4), report the gross distribution in box 1, only the earnings in box 2a, and enter Code 8 or P, whichever is applicable, in box 7. Also, enter Code 1 or 4, if applicable." (2022 Instructions 1099-R Page 11 under box 2a Traditional, SEP, or SIMPLE IRA.)

@drezki17