Withdraw the Excess Contribution from Your Roth IRA (no earnings, lost money)

[liaocs2008]

Hi folks,

I opened Roth IRA and I contributed $5000 in 2021. Unfortunately, I didn't have any earnings but lost for my Roth IRA. In 2022, I only got 5498 form ($3000) for Roth IRA where my market value is lower than my contribution. Also in 2022, I realized that I shouldn't contriube to Roth IRA due to my income, and I am terrible at investment. I just sold everything in Roth IRA and transferred all the money ($1800) out. This year 2023, I have recevied my 1099R, and I am working on correcting the 2021 tax return in Turbotax. 

I have found some suggestions as following:

Made the contribution to the Roth IRA in 2021, and withdrew it in 2022 
This is probably the most common situation: If you made the contribution to your Roth IRA in 2021 (between January 1, 2021 and December 31, 2021), and you withdrew it in 2022, you'll get a Form 1099-R. However, you might not get the Form 1099-R until 2022.
Your Form 1099-R will have a code P and a code J in box 7.
The Form 1099-R will indicate it is for 2022. One way to handle this is to create an amended 2021 return (Form 1040X) and include it there.
There's an easier way, though: Just enter the Form 1099-R on your 2021 return. When you do, enter code P and code J in box 7. You will be asked whether this Form 1099-R was issued with the year 2021 or 2022 printed on it. Select 2022.

However, my 1099R box 7 only comes with code J, no code P. I tried to open turbotax 2021 version and put in the new 1099R. Turbotax didn't ask me wheather this 1099R was issued with year 2021 or 2022. Instead, it asks me to pay the 10% penalty for $1800. I am also not sure how much I should input for withdrawing in 2021. If I put 1800, the software assumes I have money left in Roth IRA. But in real life, I am impossible to withdraw $5000 from Roth IRA.

May I ask what I should do now to correct my 2021 tax report? In addition, is it possible to use turbotax 2022 version to file the amended 2021 tax return? must I file these two tax return seperately, one in turbotax 2021 and the other in turbotax 2022?

[DanaB27]

No, you need to use the 2021 version to file the 2021 amended return. Please see How do I amend my federal tax return for a prior year?

If you received a 2022 Form 1099-R with code J only then this means you requested a regular distribution instead of the withdrawal of excess contribution plus earnings. I would check with your financial institution if they can send you a correct Form 1099-R with codes J and P.

A 2022 Form 1099-R with code J only would belong on your 2022 tax return instead of your 2021 tax return. For your information when you enter your net contributions ($5,000) in the follow-up question then you shouldn't get the 10% penalty since you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. But as I stated above I would try to get the corrected 2022 Form 1099-R.

On your 2021 amended return, you can enter on the penalty screen during the IRA contribution interview that you withdrew the $5,000 excess contribution by the due date since you withdrew the full excess contribution with a loss.

[liaocs2008]

Thanks! My finance institution refused to update tax form. What can I do then?  

[DanaB27]

You could file a substitute 2022 Form 1099-R with codes P and J and amend your 2021 tax return.

Or you report the 2022 Form 1099-R with code J on your 2022 tax return (you can withdraw Roth contributions tax- and penalty-free):

1. Click "Wages & Income" (under Federal) on the left
2. Scroll down and click "Show more" next to "Retirement Plans and Social Security"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Enter all your 1099-Rs
5. Click "Continue" on the "Review your 1099-R info" screen
6. Answer all the questions and make sure you enter the net contributions prior to 2022 (include the $5,000 contributed for 2021) on the "Enter Prior Year Roth IRA Contributions" screen
7. Answer the remaining question.