Roth IRA contribution too high

[randomnyc]

First time filer, filing my taxes for Y2020.

Background: Single Filer, 1099-G (unemployment income only) of ~19K.

I created a Roth IRA in Feb 2021 and contributed 5K towards my 2020 Roth contribution.

From my understanding, I cannot contribute to my Roth since my income is only derived from 1099-G.

My balance in my Roth IRA account is slightly smaller than my contribution, roughly $200 less. So $4800 versus $5000 contributed.

After research, I was told that I should immediately withdraw (contribution + gains if applicable) and they would send me a 1099-R.

1. I was told that any gain/loss in 2021, would be applicable to Y2021.
2. Will I receive this 1099-R this year to apply to my Y2020 taxes or Y2021? If it applies to Y2020 if I file now and receive the 1099-R later, will I have to amend my taxes?
3. If I receive the 1099-R in Y2021 for this mistake, how will this affect my taxes in 2021, when I do get a job and contribute towards my 2021 Roth IRA limit?

For filing itself on turbotax, there's three sets of information that I have to input

1. Did you have any retirement contributions or investment expenses for 2020? (I put in yes and typed in a Roth contribution of $5,000).
   1. >System then tells me that my contribution is too high.

2. Tell us the value of your Roth IRA. (I inputted $4,800 as my balance is slightly smaller due to fluctuation in stocks)

3. You currently have a penalty. Contribution withdrawn before due date of your return = ?

What should I put in for questions 1, 2, 3?
Do I put in $4,800 withdrawal for a loss, or do I state that I will withdraw the full $5,000 even though my balance is smaller than my contribution?

Thanks

[DanaB27]

1. Yes, you enter the $5,000 Roth IRA contribution.

2. Yes, enter $4,800 for the value

3. Enter $5,000 as the amount of excess contribution withdrawn by the due date.

You will get a 2021 1099-R in 2022 for the withdrawal of the excess contribution.

Only the earnings have to  included in the taxable income. "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." (IRS )

But you had no earnings therefore the distribution will not affect your taxable income. 

If you get a job in 2021 then you can contribute to a Roth IRA if your Modified Adjusted Gross Income is under the limit. The withdrawal of excess contribution will not affect your ability to contribute to the Roth IRA for 2021.

[randomnyc]

Hi Dana,

Thanks for the answers and some follow up questions

Some of my positions moved today and ended up being positive. (Current balance $5,100).

1. My contribution would still be $5,000, so would I enter 5K?

2. Would I input a current value of $5,100?

3. Would this excess contribution amount be $5,000 or $5,100 (current balance)?

And just to clarify, since my contribution was in 2021, even if it was contributed towards my 2020 limit, I would get a 2021 1099-R to file in Y2022, correct? Since the contribution itself was in 2021.

[MinhT1]

If you withdraw your 2020 excess contribution to your Roth IRA before the due date of the 2020 tax return, make sure that you also withdraw the related earnings.

On your 2020 tax return, do not report the excess contribution as it has been withdrawn. The earnings have to reported and taxed. These earnings are also subject to 10% early withdrawal penalty.

When you receive the 2021 form 1099-R (in 2022) for this withdrawal, there is no further action needed.

[randomnyc]

Hi Minh,

I will be withdrawing the excess contribution before the due date of my 2020 tax return which is May 17th. To clarify, I would not report any Roth IRA contribution?

I am stuck on the contribution part while filing my taxes as stated in my original post and I would like to clarify if I need to report this contribution and then withdraw it while waiting for a 2021 1099R (that would appear in 2021).

[ReneeM7122]

Yes, you need to report both the excess contribution and the backout.  To do this in TurboTax, please follow these steps:

• Enter the 1099-R with the total distribution in box 1 [the contribution plus the earnings]
• Enter the earnings in box 2a
• Enter code "P" in box 7 (Top) 
• Enter code "J" in box 7 (Bottom).
• On the "Which year" screen say that this is a 2020 1099-R.

Here is a thread with more information.

[randomnyc]

Hi, to clarify, I did not receive the 1099-R and the 5K contribution was contributed in Feb 2021 for Y2020. This would mean that I would receive a 2021 1099-R for Y2022 for this over-contribution correct?

Also, in regards to these three questions, how would I fill it out?

1. How much did I contribute?
2. Current account balance?
3. How much will you withdraw?

What would be the answer if I contributed $5,000 but my current balance is $5,100?

I believe #1 would be $5,000

#2 would be $5,100

But I'm not sure what the exact number for #3 would be

[DanaB27]

Yes, you will receive a 2021 1099-R in 2022 for the withdrawal of excess contributions and earnings. The earnings will be include in your taxable income and if you are under 59  1/2 you will pay a 10% early withdrawal penalty on the earnings.

1. You will enter $5,000 as contributed.

2 . Yes, enter $5,100

3. You will enter $5,000 (the amount of excess contribution withdrawn, do not include any earnings or losses).

[randomnyc]

Hi Dana,

So would my timeline look like this?

1. Go to my IRA custodian (TD Ameritrade) and file a Removal of Excess-Form  to generate the 1099-R.

2. File my taxes for Y2020.

3. Receive 2021 1099-R form in Y2022 and I would just throw that into my taxes for Y2022 (2021 taxes)

Also, where would I find the exact value of what to input for current account value? Would I just my current account value before I ask them to file the 1099-R?
The reason why I'm confused about my current account value is because TDA takes fees per options trade.

So contribution may be 5K and my current balance is like $5,105.65 or something (due to option trading fees). Would I just take this ending balance of $5,105.65 right before I file this removal of excess form and input that into question 2 about the "current account value"? Or will generating the 1099-R give me some sort of new current balance?

https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA1401.pdf

^This would be the removal of excess form to generate the 1099-R.

[DanaB27 · Accepted solution]

Yes, you will request the withdrawal of excess contribution and earnings with your bank. They should be able to tell you the earnings on the amount.

Yes, you will file your 2020 tax return and will not have the 6% penalty because you are removing the excess plus earnings by the due date. Yes, enter the value amount from the day you request the withdrawal.

Yes, you will get the 2021 1099-R in 2022 and file it with your taxes. If the 1099-R shows code 8 in box 7 then you will file it in your 2021 tax return. If your 1099-R has code P in box 7 then you will have to amend your 2020 tax return and include it on your 2020 tax return.

[randomnyc]

Thank you very much for your help Dana! Really appreciate you and the rest who helped.