Is NIA from removal of excess Roth IRA taxable 2016 or 2017?

[jenfeldmann]

I had excess Roth IRA contribution for 2016. I have removed the contribution prior to filing my tax return.  The Net Income Attributable (NIA) was also distributed. I am under 59 1/2.

1. Is the NIA distribution taxable, or can it be considered removal of contributed funds (the Roth IRA has contributions from prior years). 
   
2. If it is taxable, is it reported in 2016 (same year as the excess contribution) or 2017 (year the distribution was made)?
3. If taxable in 2016 how to I report without a 1099-R?
   

[dmertz · Accepted solution]

The NIA is taxable and subject to a 10% early-distribution penalty.  The NIA is taxable on the tax return for the year in which the excess contribution being returned was made.  That would be the 2016 tax return if the contribution for 2016 was made in 2016 (code JP on the 2017 Form 1099-R) or on the 2017 tax return if the contribution for 2016 was made in 2017 (code J8 on the 2017 Form 1099-R).

To report a code JP 2017 Form 1099-R on your 2016 tax return, simply enter the Form 1099-R into 2016 TurboTax as if you have already received it:

• Box 1 = gross distribution (excess plus NIA)
• Box 2a = NIA
• Box 7 = code JP

Be sure to also enter the original Roth IRA contribution and indicate in the follow-up that you had the excess returned (do not include the NIA when entering the amount of excess that was returned).

[sibandu]

How do you handle the reporting if this situation had Federal & State Tax withheld? Would you report those taxes i 2016 Tax Return OR would you report that on 2017 Tax Return?

[sibandu]

I understand from your posting that Earning is to be reported against 2016 Tax Return but i am confused on taxes portion of earning if they were withheld

[dmertz]

It's really unusual to have taxes withheld from a return of contribution, particularly on a code JP Form 1099-R.  In this case, you would need to report the 2017 Form 1099-R on both your 2016 and 2017 tax returns.  TurboTax knows that the amount in box 2a is income (potentially subject to penalty) on your 2016 tax return but that the tax withholding is reportable and creditable on your 2017 tax return.

[sibandu]

Thanks. This helped clarify the confusion. I am doing this so that i can report the earning from Roth IRA excess contribution in my 2016 return this way I wont have to amend 2016 return in 2017 when i do the taxes for 2017. I would get my 1099-R in 2018 for excess contribution i removed in February 2017. Yes it has Federal and State Taxes withheld (10% of earning) by Vanguard. My Roth IRA excess contribution was $4000 due to earning limit so i removed the excess contribution and earning which was about $4803. This means my taxable earning is $803 which i will report in Box 2a. Vanguard applied 10% for Federal tax and with held $80 and also withheld MA State Tax of about 42.

[dmertz]

When entering the 2017 Form 1099-R into 2016 TurboTax, I would probably omit the amount from box 4.  Entering the tax withholding in box 4 may cause TurboTax to try to include the made-up 2017 Form 1099-R in your e-filing (although it shouldn't since the tax withholding does not apply to 2016).  TurboTax used to have a bug where it credited the tax withholding to *both* years, so this area has not been without its challenges.

[jenfeldmann]

Thank you for your help on all this.  I have one more question about the Box 7 codes for Form 4852.

I have one form for myself, and one for my husband (both of us have excess contribution and NIA).

He was 60 when the excess distribution and NIA was removed from his account (59 when the contribution was made).  His form is just P?

I was 55, so my form is JP?

Or do we both use JP so that the NIA because the earnings are taxable?

[dmertz]

His must also have code JP.  The J is necessary to indicate that the return of contribution was from a Roth IRA.  His penalty can be eliminated by claiming an Other Reason exception to the early-distribution penalty on the amount of the earnings.

Since the real Forms 1099-R are not late, I would not be entering this as a substitute Form 1099-R.  The explanation statement that you must prepare for the return of contribution will suffice to explain the taxable earnings appearing on Form 1040 line 15b or Form 1040A line 11b.  Entering it as a Form 4852 will preclude you from e-filing.

[jenfeldmann]

TT created the form 4852, so I must have checked something wrong?  Is the 1090-R created in TT included in the e-filing?  If I don't e-file, is there any downside to including 4852?

[dmertz]

TurboTax prepares Form 4852 if you mark the "I need to prepare a substitute Form 1099-R" box on the Tell Us Which 1099-R You Have page.  If you decide not to submit Form 4852, you'll likely need to delete the Form 1099-R, then delete the Form 4852, then enter the Form 1099-R again.

If you enter a Form 1099-R that shows no tax withholding, TurboTax does not include the details of the Form in your e-filing.  Only the amounts that need to appear on your tax return are the gross amount on Form 1040 line 15a, the taxable earnings on line 15b, the Form 5329 to calculate the 10% penalty on the earnings, the penalty appearing on Form 1040 line 59, and your explanation statement that you prepare after entering the code JP Form 1099-R.

If you don't e-file, the only potential downside to including Form 4852 is that it may increase scrutiny of your tax return, but that generally should not be a problem.  With just an e-filed explanation statement, I don't know that a person would ever look at it unless they had another reason to do so.  Filing Form 4852 also requires that you provide a description of your attempts to get the Form 1099-R from the payer.  I take the position that the 2017 Form 1099-R is not late or missing until after February 14, 2018, so Form 4852 is not appropriate.  But it's your choice, either way should be fine.

[jenfeldmann]

Thanks so much.  I've managed to remove 4852.  All looks good now.  You have been amazingly helpful, I can't thank you enough.

[TheLendrumFamily]

dmertz,

I have read your replies and am impressed with your knowledge and your willingness to help folks out.  I'm wondering if you are a CPA? My wife and I are both military and have made some similar mistakes in our Roth IRAs (excess contributing).  We are in need of a CPA that we can retain to help us with our taxes from 2017 to current and future filings.  I am trying to figure it all out but am struggling with all of the IRS publications and forms.  Let me know if you can help.  My e-mail is [email address removed] and I look forward to hearing from you.

Thanks,

-Tim

[dmertz]

Not a CPA or any other type financial professional.  I and my family members have just had many different types of retirement accounts and in the past have had financial institutions, particularly banks, and financial planners make a variety of mistakes regarding them.  I've made it my goal to know as much about these types of accounts and the associated transactions and reporting as I possibly can so that I can avoid me and financial institutions making mistakes, some of which can be unrecoverable.  Since I specialize in this area, I suspect that I am more knowledgeable on this subject than most CPAs.