Withdrew excess contribution to from Roth IRA mistake code

[pbartoli]

Hi folks, 

In 2023 my wife and I got married and had some unexpected income, bringing our joint income into the range where our Roth IRA contributions would be limited. I didn't realize this until it was tax filing time in march 2024. Both of our IRAs had been overcontributed by $1800, each, so I tried to withdraw these contributions through vanguard. I did mine correctly (it seems) and this year received a 1099R coded JP for 2024 with approximately $200 in taxable amount (earnings) in box 2a and ~$2000 in the total amount (I told vanguard $1800 and they automatically calculated the earnings for me). If I understand correctly, I am to file a 2023 amendment with this 1099r and am liable for the taxes on the amount in 2a. Seems fair enough - but wanted to confirm? 

The real issue is with my wife's withdrawal. For some reason, and I don't know why, I made a mistake and instead of going through the proper Vanguard process, I simply withdrew funds from her Roth IRA in a two step process; first, by selling $2000 worth of stocks (I guess my calculation was based on what I'd seen from vanguard) in mid march, and second, by clearing out of the vanguard settlement fund on April 16 2024. 

All mistakes on my part, because now her 2024 1099R is simply coded J, not JP, and is being taxed entirely as earnings. She has nothing in box 2a. Box 2b is checked. Box 4 says $201 was withheld in federal taxes. When I enter this information into the software I get a calculation of another $500 in taxes. This seems wrong? 

As I see it we have several problems. 

1. Coding J vs JP. I called vanguard and they said there's nothing they can do, since the transactions happened so long ago. Such is life. I figure this is just the deal, and I'll have to pay for the consequences. Do I just file the 1099r as it's been printed? 

2. Year. The excess contributions happened in 2023, but I caught it in 2024. I'm not sure how this should be filed - either in 2024 or with a 2023 amendment - because of this timing, plus the two step issue in the transaction. Any advice? 

[DanaB27]

1. You will enter the Form 1099-R with code J as shown. Please make sure you answer the Roth follow-up questions:

1. Click on "Search" on the top and type “1099-R” 
2. Click on “Jump to 1099-R” and enter all your 1099-Rs
3. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
4. Answer "Owned Any Roth IRA for Five Years?" screen
5. Continue through the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen (include the excess contribution amount removed in this amount)
6. On the "Any Roth IRA Conversions?" screen answer "Yes" if you made conversions before 2024
7. Continue through the questions.

2. Yes, you will need to amend your 2023 return to add the 2024 Form 1099-R with code P and J if you didn't report the earnings when you originally filed the return. Please see How do I amend my federal tax return for a prior year?

1. Click on the "Search" on the top right and type “1099-R” 
2. Click on “Jump to 1099-R”
3. On the "Which year on Form 1099-R" screen say that this is a 2024 Form 1099-R.
4. Click "Continue" after all 1099-R are entered and answer all the questions.
5. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

[pbartoli]

Thanks so much for the quick reply! A couple follow ups, if possible. 

1. Just want to confirm, then, that we should NOT include my wife's 1099 on the 2023 amendment, but rather file it in the 2024 standard filing. Is this going to create any issues for my 2024 contributions? I maxed out at $7000 each after confirming our income was lower this year and we were allowed to go up to the limit.

2. Even though the earnings are minor (~$200) they increase my income in 2023 and therefore lower my contribution limit to the Roth IRA, meaning that even after the excess contribution withdrawal, I am again over contributing... this seems quite circular and I don't know how to resolve it. 

[fanfare]

1 No you have to amend 2023 to add 200 of income on Line 4b

2 It is the way of the Tax Code. you pay 6% penalty on your 2023 tax return. and it carries forward to  2024. You have til April 15 (Oct 15 if you request an extension) to distribute exactly the new excess or offset it with an allowed conribution for 2024 , reducing the amount you can put in for 2024, earnings on the new excess stay in the Roth because you missed the 2024 Tax Day deadline.

@pbartoli 

best to do the distribution before filing 2024.

[fanfare]

if you have unused 2024 contribution you don't need to involve  the custodian.

but request an extension anyway for time to prepare a correct 2024 tax return.

@pbartoli 

[pbartoli]

Hey @fanfare - I appreciate the response. 

1. To be clear, I understood from @DanaB27  I DO need to amend my 2023 return to include the $200 of income from MY 1099R, but NOT my wife's 1099R. That's what I was referring to.

Your #2. So I withdrew the money in 2024, and contributed as normal for 2024. My understanding is that I will pay the 6% fee on the excess contribution and that should be it? 

[fanfare]

I misspoke you report the 200 on Line 4b and put your  excess on Form 5329-<You>

For spouse follow advice of @DanaB27 

[fanfare]

"So I withdrew the money in 2024, "

having done so already, you still have to report it.

[pbartoli]

Yea, absolutely understand I need to report it! Just want to make sure I report it correctly - in the 2024 filings and with any necessary forms (still not sure?) and that I'm not creating problems down the line by messing up my 2024 contributions. 

[DanaB27]

You could request the return of excess contribution plus earning for the 2024 contribution in amount of the new excess contribution since you contributed already the full amount for 2024. Then you would be able to apply this new excess from 2023 to 2024. In this case you would only pay the 6% penalty on your 2023 return.

On your 2024 return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Enter the Roth IRA contribution for 2024 minus the amount withdrawn to be able to apply the excess from 2023.
5. On the "Do you have any Excess Roth Contributions" answer "Yes"
6. On the "Enter Excess Contributions" screen enter the total excess contribution from 2023
7. On the "How Much Excess to 2024?" screen enter the amount applied as 2024 contribution.

If you do not want to withdraw part of the 2024 contribution plus earnings then you can pay the 6% penalty on the 2024 return for the new 2023 excess. You then will take a regular distribution in amount of the new 2023 excess contribution in 2025. This distribution will be reported on your 2025 return and then resolve the new 2023 excess contribution.

[pbartoli]

Thanks. This is regarding my new excess, correct? Just want to be sure I'm understanding you correctly. 

In the first option you're saying contact my custodian, withdraw the new excess + earnings, and then include that on the 2023 amended return, which will "charge" me the 6% fee? 

And the second option is to include/report the new excess in the 2024 filing, pay the 6% fee, and then take regular distribution over the course of this year. I am concerned that in this latter option I'll end up paying more, as it's effectively what happened to my spouse, right? In her example...

She had an excess contribution in 2023 (I can report it on the amendment) so I should pay the 6% fee, and then I took a distribution in the amount (actually more) in 2024, but now I'm being charged further taxes on that distribution - on top of the withholdings that already exist on that distribution. 

[fanfare]

When someone misses  the deadlne to remove the new excess which suddenly appeared. they must pay 6%.

do a straight distribution of the new excess now. it is resolved on 2024 tax return since it is before tax day plus extensions (if 4868 submitted on time).

the custodian is involved . there are two 5329s involved. 2023 and 2024.

@pbartoli 

[fanfare]

you keep convoluting your excess and your wife's excess. each has to be handled separately.

[pbartoli]

Thanks so much for the patience, and you're very right - I am definitely getting confused by how I am supposed to treat the two separate accounts.

I can certainly do a distribution of the new excess ($130) for myself now. Should I file it with my custodian as as a withdrawal of excess or not? (I'm not sure what "straight distribution" means)

As for her, I just want to be sure that the withdrawal made in 2024 of the excess contribution (made in 2023) is properly accounted for in the 2024 filing, and that it doesn't create issues down the line with my 2024 and future contributions. 

Did I get that right?

[fanfare]

you are not allowed to do "excess plus earning" on the new excess. It is past the deadline.

the only option is distribution. (offset is off the table, if I heard you correctly since you used it up already)

If you have online access you can take $130 today or schedule it for Monday.

request an extension to have time to prepare the tax return correctly.

Extension allows you to take the $130 after April 15th.

@pbartoli