Roth IRA - return of excess

[taxquestion2020]

Hi all,

My question concerns how to properly handle an erroneous Roth IRA contribution.

In Sep 2018, I over-contributed to my Roth IRA. I had zero earned income that year, which meant that my allowable contribution was also zero (I didn’t know that at the time). I contacted my bank and they performed a “return of excess contribution,” removing the erroneous contribution and immediately re-contributing it for 2019. I chose to do that (rather than withdrawing/distributing the money) to avoid penalties. Note: I lost money on the investments made with my 2018 contribution and so did not have any earnings from it.

Looking over my 2018 return, it appears I:

1. Did include the erroneous contribution in box 4a (“IRAs, pensions, and annuities”)
2. Did not report anything in box 4b (“taxable amount”)
3. Did not include it in box 6 (“total income”)
4. Did not include it in box 32 (“IRA deduction”)
5. Did attach a supporting schedule titled “Form 5329 Statement But Form Not Required - Explanation for the Return of Excess Roth IRA Contributions” wherein I explained my over-contribution and subsequent return of excess.
6. Did record the fair market value of my Roth on a “Roth IRA Record Worksheet”
7. Did fill out a “IRA Contribution and Deduction Worksheet” but did not include my erroneous contribution.
8. Did not attach or fill out any other forms related to the contribution (such as a Form 5329 or 8606)

Now, my earned income for 2019 is also zero so I am in the same bind. I have once again performed a return of excess and re-contributed the erroneous amount for 2020 (I do plan to have income this year, which is why I don’t just bite the bullet and withdraw the contribution).

My questions are: 

1. Did I report my Roth IRA circumstances correctly on my 2018 return?
2. If not, how should I correct my 2018 return (and how should I report for 2019)?

Supporting quotes I’ve found from the IRS:

“For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed.” (Publication 590-A)

“If, in 2019, you made traditional IRA contributions or Roth IRA contributions for 2019 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2019 tax return, the returned contributions are treated as if they were never contributed. Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2019 and any related earnings on your 2019 Form 1040 or 1040-SR, line 4a; or Form 1040-NR, line 16a. Also include the related earnings on your 2019 Form 1040 or 1040-SR, line 4b; or Form 1040-NR, line 16b. Attach a statement explaining the distribution.” (Instructions for Form 8606)

Thank you very much for taking the time to read. I would greatly appreciate any help navigating this issue. 🙂

[DanaB27]

Yes, you reported the 2018 withdrawal of excess contribution correctly on your 2018 tax return.

For the withdrawal of the 2019 excess contribution (plus earnings) please follow the steps below to enter them in TurboTax:

To create a 1099-R in your 2019 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”
4. Select "I'll type it in myself"
5. Select "I need to prepare a substitute 1099-R"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and J 
9. On the "Which year on Form 1099-R" screen say that this is a 2020 1099-R.
10. Continue until you get to the explanation screen and answer that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2019.

[taxquestion2020]

Hi Dana,

Would you be so kind as to answer a few additional questions?

1. Do I need to file form 5329 to report my return of excess, or do I simply skip it since I re-contributed the moneys for 2020?

2. Do I need to add the information from my 1099-R to my income information? My 1099-R states I received gross distributions of $5XXX (censoring myself here) but of course I later re-contributed those moneys for 2020 and never received them as actual income/distributions to my checking account.

And finally, only if you have time, I had some questions unrelated to my IRA problem:

3. Do I need to report bond purchases/sales that generated no gain or loss? To explain: I like to buy bonds and hold them to maturity, and when I do so, I only earn interest on them (there are no capital gains like buying shares of Apple at $80 and selling at $100). Do I need to report these as sales, or can I simply report the interest I earn? The tax program I'm using (HR Block) appears to pull them in as short-term sales with a $0 gain/loss.

4. Related to that question, how do I correctly report bond quantities? Bond purchases are kind of strange in that if I want to buy 2 bonds of $1000 each, they are recorded by my bank in the quantity of 2,000, not 2. This is how it's reported on my 1099-B, and this is also how HR Block pulls the information (ie, a quantity of 2,000 instead of 2). Is this correct? I believe this is how I've reported my bond sales in previous year, but I'm curious what you think.

5. How do I report accrued interest payments? These are payments I make to the original bond holder when I buy their bonds (eg, if I buy a bond halfway through its lifecycle, I pay the bond holder for that "accrued interest" time). It appears HR Block has a reporting field for this (see attachment), but I believe it is actually for accrued interest that I receive, not pay out. Am I required to report accrued interest that I paid out?

6. And finally (sorry!), are you aware of any itemized deductions that can be added on top of the standard deduction? It appears that student loan interest can, but I'm wondering if you know of any others.

Thanks so, so much. If you're pressed for time, please ignore questions 3-6.