I am using the Desktop version of Turbo Tax and am going through the section where I list the information for my 1099R. I have a Roth IRA and I am only withdrawing the contributions. The Vanguard website states:
"Withdrawals before age 59½:
Withdrawals of Roth IRA contributions are always both tax-free and penalty-free. But if you’re under age 59½ and your withdrawal dips into your earnings—in other words, if you withdraw more than you've contributed in total—you could be subject to both taxes and penalties on the earnings portion of the withdrawal."
But when I use Turbo Tax there is no way for me to avoid the 10% penalty. It also treats the entire withdrawal as if I need to pay taxes on it again! This is clearly wrong and the questions never ask me how much Roth IRA contributions I have made. Please provide guidance on how I can resolve this issue. I am only withdrawing my contributions and it should be completely penalty free but Turbo Tax thinks I owe 10%.
-Thanks,
-Destinx
You are understanding it correctly. If you are only withdrawing your original contributions to the Roth IRA, then there is no penalty or tax owed.
The problem is that you have not entered the basis of the Roth IRA in order to get the proper tax treatment of your distribution.
Use the information below to do so:
This will bring you to a screen with check boxes to indicate what types of account you had in 2019. Be sure that Roth IRA is checked. Click Continue.
If Traditional IRA is checked or if you have a spouse that had either type of account, the next questions will not pertain to your Roth IRA. Continue through this section until you are asked whether you made any contributions to your Roth IRA for 2019. This is the beginning of the section where you will enter details about your Roth IRA, including the basis.
Continue answering the questions according to your situation. On the screen where you see Let Us Track Your Roth IRA Basis, click Yes.
Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2019 (basis). If your basis exceeds your distribution, then the distribution will not be taxable. If the distribution exceeds your basis, then the excess will be taxable.
Finish the rest of the follow-up questions about your Roth IRA.
You may need to go back through the Form 1099-R section showing your withdrawal to be sure the follow-up questions are completed properly.
To avoid the penalty, you must hold the account for at least five years and/or have an exception for the early withdrawal penalty.
-@KrisD15
According to Vanguard's website:
"Guidelines for withdrawals Withdrawals before age 59½
Withdrawals of Roth IRA contributions are always both tax-free and penalty-free. But if you’re under age 59½ and your withdrawal dips into your earnings—in other words, if you withdraw more than you've contributed in total—you could be subject to both taxes and penalties on the earnings portion of the withdrawal.
Withdrawals of your traditional IRA contributions before age 59½ will result in a 10% federal penalty tax plus regular income tax on the taxable amount of your withdrawal—generally the entire amount—unless you qualify for an exception."
Since I am only withdrawing the contributions on my Roth IRA I should be able to get them both tax-free and penalty-free. Am I misunderstanding something?
-Thanks,
- Destinx
You are understanding it correctly. If you are only withdrawing your original contributions to the Roth IRA, then there is no penalty or tax owed.
The problem is that you have not entered the basis of the Roth IRA in order to get the proper tax treatment of your distribution.
Use the information below to do so:
This will bring you to a screen with check boxes to indicate what types of account you had in 2019. Be sure that Roth IRA is checked. Click Continue.
If Traditional IRA is checked or if you have a spouse that had either type of account, the next questions will not pertain to your Roth IRA. Continue through this section until you are asked whether you made any contributions to your Roth IRA for 2019. This is the beginning of the section where you will enter details about your Roth IRA, including the basis.
Continue answering the questions according to your situation. On the screen where you see Let Us Track Your Roth IRA Basis, click Yes.
Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2019 (basis). If your basis exceeds your distribution, then the distribution will not be taxable. If the distribution exceeds your basis, then the excess will be taxable.
Finish the rest of the follow-up questions about your Roth IRA.
You may need to go back through the Form 1099-R section showing your withdrawal to be sure the follow-up questions are completed properly.
Your Roth IRA withdrawals may be taxable if: you've not met the 5-year rule for opening the Roth and you are under age 59 1/2:
You will pay income taxes and a 10% penalty tax on earnings that you withdraw. The 10% penalty may be waived if you meet one of the eight exceptions to the early withdrawal penalty tax.
Have you entered an exception for the 10% penalty? Also check to see if you accidentally may have indicated that this is a traditional and not a Roth IRA.
If this doesn't work, you may wish to contact a specialist that can work through that section of the return with you. The specialists can look at your return on their screen to find out exactly what is causing this issue and take corrective action if needed.
Thank for this great answer. I have one more thing to add. What if you withdrew contributions but it was in March and you also withdrew from the contributions that you made in January, February, and early March. How do I tell the system that that was contribution money since the software asks for prior-year contributions only?
Thanks!
To clarify, were these excess contributions you withdrew or were these normal contributions where you had a change of heart?
If you made a Roth contribution for 2021 and then later withdrew these contributions you will still enter the contribution in the IRA contribution section. Then TurboTax will add this contribution to your prior year's contributions.
> Then, on the screen titled Enter Prior Year Roth IRA Contributions, this is asking for your total contributions for years prior to 2019 (basis). If your basis exceeds your distribution, then the distribution will not be taxable. If the distribution exceeds your basis, then the excess will be taxable.
This is wrong because it doesn't account for money that you had contributed this year. Ex- My prior years contributions are $2000, but this year I contributed $6000 and withdrew $6000. So according to your logic, I should pay a penalty on the $6000 even though I only withdrew what I contributed. I can't get turbotax online to realize this unless I lie to it or remove documents and I don't know what to do anymore...
Please make sure you enter your 2022 Roth contribution first then TurboTax will correctly calculate the withdrawal as non-taxable.
Then enter your Form 1099-R and answer the follow-up questions:
Just tried that again step by step and it still thinks I need to pay a 10% early withdrawal penalty
Check to make sure the code on your form 1099-R in box 7 has a B in it. It should be 1B. If it is just a '1' then it was coded as an early withdrawal in error when it was issued and that can't be corrected by TurboTax - that needs to be corrected by the folks who issued you the 1099-R.
My 1099-R has 8J in it which according to my searching correctly indicates a return of a contribution.
Ok, and you have correctly claimed the "Other Reason" on the distribution and you are over 59 and a half?
The Other Reason/claims page there is for if you used the money for a qualified reason which is unrelated to pulling out a contribution.
And you don't have to be over 59.5 to pull out contributions you've made to a Roth IRA without penalty.
It seems you have requested a return of excess contribution plus earnings because of your code 8J in box 7. A regular distribution would have code J if it was an early distribution and then the steps mentioned above would be applicable (contributions withdrawn would be tax- and penalty-free).
Since you have a return of excess contributions plus earnings, the earnings will be taxable and subject to the 10% early withdrawal penalty (if you are over 59 1/2 you can enter the exception for the penalty). Only the earnings should be listed in box 2a taxable amount.
If you believe your financial institute gave you the wrong form because you made a regular distribution then I would advise you to contact them.
To enter the Form 1099-R with code 8J:
They ended up returning to me $5914 which I thought was strange at the time. So that would suggest that my contribution lost money while in there and therefore shouldn't have to pay any penalty on it.
But I suppose there's nothing turbo tax can do about that and that I should probably contact Fidelity to see if they can do anything about it.
If you had a loss on the return of excess contribution then box 2a should be $0 and you should have $5,914 on line 4a and $0 on line 4b on Form 1040 (assuming you didn't have any other Form 1099-R).
To preview Form 1040:
Yes, it might be best to contact Fidelity to correct Form 1099-R if necessary.