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Question

What/how do I report a removal of excess Roth IRA contribution made in 2018?

Forum|Forum|6 years ago
February 16, 2020
5 replies
0 views

I learned this year that I was ineligible to make Roth IRA contributions in 2018 and 2019. I learned that I can recharacterize my 2019 contributions as Traditional IRA contributions. I was told that I should not report this on my tax form but, instead, attach a statement to my tax form with this recharacterization.

My next step is to withdraw my excess contribution made in 2018 since I can’t recharacterize it. I was told that I can keep the earnings in the Roth IRA account. However, I don’t know what the reporting rules are. I know that I have to pay a 6% fee on the contribution because it was in the account for a year. Should I expect to receive something from the financial institution and do I report it this year? Do I have to amend last year’s tax return?

DianeC958

Yes you will receive a 1099-R from the financial institution once you withdraw the excess contribution. The 1099-R for the withdrawal will have the year 2020 on it since you did not withdraw the funds until 2020.

If you withdraw the excess contribution in 2019 and you have not yet filed your tax return, you can report the withdrawal so you are not charged the 6% penalty for 2019.

To report the withdrawal you create a substitute 1099-R

You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),
The earnings in box 2a,
Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2016 "
Enter code "J" in box 7 (Bottom).
On the "Which year" screen say that this is a 2020 1099-R.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Jdcasares129Author

Thank you! Just to make sure I have it right, I learned about this error last and week and am in the process of withdrawing the 2018 excess contribution now before doing my 2019 tax return. Can I submit the 1099-R on my current return and avoid paying the penalty for 2019? In that scenario, I think I’d just have to pay the penalty for 2018.

DianeC958

Yes you can report the withdrawal of the excess contribution on your 2019 return.

Open (continue) return if you don't already have it open.
Inside TurboTax, search for 1099-R and select the Jump to link in the search results.
Answer Yes on the Your 1099-R screen,
Click on the box that you are creating a substitute 1099-R
Then select Continue.

The codes you will need for box 7 are J and P.

Since this is a Roth IRA the only amount that is taxable are any earnings on the excess contribution.

You will receive a 1099-R for the withdrawal in 2020 you do not need to report the information since you have reported it on your 2019 tax return.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

hybridtaxguy

I over contributed to my roth ira in 2020, I'm 29 years old. I over contributed by 4,000, when I noticed I had added too much I withdrew my over contribution plus the earnings, for a total of 4585.87 (585.87 of earnings)

added 2k in March 2020, 2k in October 2020, withdrew early December 2020.

I entere dmy 1099-R, it looks like im paying tax on the full 4585.87, since it was an over contribution all done within the current year, my understanding is that I should just be paying tax on the 585.87 (the earnings). Am I missing something? I don't see any prompts from Turbotax on how to explain that it's a removal of excess contributions and I'm paying about $1500 in tax on this.

IRS Box Item Value

1 Gross Distribution $4,585.87

2a Taxable Amount $4,585.87

2b Taxable Amount Not Determined Yes

2b Total Distribution No

4 Federal Income Tax Withheld $458.59

7 Distribution Code(s) J8

7 IRA/SEP/SIMPLE No

14 State Tax Withheld $0.00

17 Local Tax Withheld $0.00

I've spoken with 6 Turbotax reps who could not help me. I would love an answer.

dmertz

chadbrucato, your Form 1099-R was not prepared in accordance with the instructions for Form 1099-R. Normally on a code J8 Form 1099-R the payer will not mark box 2b Taxable amount not determined and will include only the taxable earnings in box 2a, in this case apparently $585.87. If the Roth IRA custodian calculated the earnings, there is no reason that the Roth IRA custodian should have don otherwise.

The fact that box 2b Taxable amount not determined is marked seems to suggest that you did the earnings calculation and told them the total to distribute and they chose not to get involved in determining if your calculation was correct. If that's the case, it seems that they should have left box 2a blank.

If they did the earnings calculation, I suggest getting them to correct the Form 1099-R to have only $585.87 in box 2a and to have box 2b Taxable amount not determined unmarked. Otherwise, you'll need to submit a substitute Form 1099-R (Form 4852) to show this and provide explanation, which will require that you print and mail your tax return.

hybridtaxguy

Betterment told me to fill out an 8086, but that doesn't seem to get prompted within turbotax.

krichards4

Client reported incorrect excess Roth contribution of $600 on her 2019 tax return. She paid the 6% penalty on her 2019 tax return, and now apply that $600 to her 2020 Roth contribution. The problem is, the excess in 2019 was actually $650. She paid the 6% penalty on the 600 but not the $50. She did not withdraw and now apply the whole $650 as 2020 Roth contribution. How do we remedy the penalty on the $50 that was not paid in 2019. TTO not letting us force the form 5329 to enter the penalty. Can we enter the $50 as taxable income for 2020, but still how to report the 6% penalty on the $50 for 2019?

WendyN2

There are two things you can do. The first, and unfortunately, the best choice, is to amend the return as this will allow you to state the exact reason for the amendment and therefore the payment will get applied correctly to the "reason code" that it should get applied to. Some in past have just sent in (mailed CM/RRR) a copy of the incorrect return with a letter and a check (with SS# and short detail in memo field) and they have "squeaked by" unscathed, so to speak. However, given all the issues and troubles/confusion the IRS is having with 2019 and 2020 she's better off filing the amended return - in my professional opinion.

Nitin_Texas

Hi,

I have similar question.

- I contributed $6000 to my Roth IRA for 2019.

- I withdrew $6000 (it was less amount since I had loss on it) BEFORE the tax due date in 2020.

- I didn’t report the contribution and withdrawal in my 2019 tax return.

- In 2020 I received 1099R from the financial institution which I reported in my 2020 return.

- when filing 2020 returns it says you may have to amend your 2019 tax return.

What do I do now? I’d really appreciate any help and guidance on this

macuser_22

@Nitin_Texas wrote:

Hi,

I have similar question.

- I contributed $6000 to my Roth IRA for 2019.

- I withdrew $6000 (it was less amount since I had loss on it) BEFORE the tax due date in 2020.

- I didn’t report the contribution and withdrawal in my 2019 tax return.

- In 2020 I received 1099R from the financial institution which I reported in my 2020 return.

- when filing 2020 returns it says you may have to amend your 2019 tax return.

What do I do now? I’d really appreciate any help and guidance on this

If box 2a is zero, I would not do anything. It would have no effect on your 2019 tax return.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

sf29

I have a similar situation.

In July 2021 I made a $6000 contribution to a Traditional IRA for tax year $2021 (there was previous years money already there).

In February 2022 I found I was only eligible to deduct $970. I should have left the rest in as a non-deductible IRA contribution, but made the mistake of asking fidelity to recharacterize the $5030 to a Roth IRA. They calculated that the total with gains was $5085 and moved that to a new Roth IRA. I received a 1099R for the $5085 with code R.

The account has lost 70% of its value and now only has $1500.

Since it is past the Oct 2022 deadline, I think I need to withdraw the contribution and pay the 6% penalty. But is withdrawing the entire $1500 enough?

Do I need to amend my 2021 return or just report everything on my 2022?

dmertz

@sf29 , you did not say if the Roth IRA contribution that resulted from the recharacterization was and excess contribution or not, but if you are married, that would likely be the case. Otherwise, the Roth IRA contribution probably was not an excess contribution. I'll assume that it was an excess contribution since you are posting on an old thread about excess Roth IRA contributions

For the $5,030 excess Roth IRA contribution made for 2021, you must file 2021 Form 5329 to report that and pay the 6%, $302 penalty. You also must include 2022 Form 5329 with your 2022 tax return and either be able to apply some or all of the $5,030 excess as your Roth IRA contribution for 2022 or you must pay a 6% penalty on the lesser of $5,030 or the 2022 year-end value of your Roth IRAs.

To resolve any remaining excess in 2023 when your balance in Roth IRAs is less than the remaining excess, you'll need to take a regular distribution of what remains in your Roth IRAs. In such a case, the instructions for Form 5329 say to include the entire excess from line 18 on Form 5329 line 20, not just what you took out, eliminating your entire excess. 2023 TurboTax will do this for you when you indicate to TurboTax that you had no Roth IRAs "open" on December 31, 2023.

If your 2021 tax return included Form 8606 showing a $5,030 nondeductible traditional IRA contribution, you must amend to remove that.

sf29

@dmertz ,

Thanks for your reply. You are right that this was an excess Roth contribution. Your instructions are very clear and appreciated.

The one last question I have is that even though this Roth IRA dropped in value, I have a Roth IRA at a separate bank that has previous year converted money. About $10k.

So my plan is to amend my 2021 return to remove the form 8606. Then file 2021 form 5329 and pay the penalty.

I would like to take the distribution option of the excess contribution. Can I withdraw just the balance of that one account where these entire contribution was put and that lost value? or do I need to remove money also from my separate Roth Account?

If I withdraw the excess contribution right now, can I avoid paying the 6% fee for this year?