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Excess Roth IRA contribution withdrawn: where to report the earnings?

puravidapto
Level 7

A 30 years old client made a Roth IRA contribution 6000 in 0815/2020 for the year 2020, later she found the error and withdrawn the contribution plus earning 500 in 01/15/2021, no forms issued.

I believe I only need to report the 500 as taxable as ordinary income, right? Where should I report, 1099-R input? and what code should I use? Thanks a lot!

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qbteachmt
Level 15

IRS Pub 590a:

"How to treat withdrawn interest or other income.

You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.

Form 1099-R.

You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.

Example.

Maria, age 35, made an excess contribution in 2019 of $1,000, which she withdrew by April 15, 2020, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2019 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she isn’t yet 59½ years old), but she doesn’t have to report the excess contribution as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2019."

 

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32 Comments 32
Just-Lisa-Now-
Level 15
Level 15

I think you'll have a 1099R for 2021 that will have the earnings on it to report next year.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
qbteachmt
Level 15

IRS Pub 590a:

"How to treat withdrawn interest or other income.

You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.

Form 1099-R.

You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.

Example.

Maria, age 35, made an excess contribution in 2019 of $1,000, which she withdrew by April 15, 2020, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2019 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she isn’t yet 59½ years old), but she doesn’t have to report the excess contribution as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2019."

 

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puravidapto
Level 7

I think the 1099-R received for 2021 will have a code P on it, and the earnings should be reported in prior year. The IRS pub 590-B says:

Withdrawals of contributions by due date.If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

The follow up questions are:

  1. Are this earning subject to early distribution penalty?
  2. What is the distribution code when we enter data or does the IRS sees the code?
  3. The IRA checkbox on 1099-R is for both traditional IRA and Roth?
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puravidapto
Level 7

qbteachmt,

Your quoted text is in the traditional IRA section, but I think the concept applies to Roth:  non-qualified distribution is subject to penalty while the criterion for qualified distribution differ, for example, the five year rule is unique to Roth. I will mark your post as the right answer, let know if anybody disagrees. Thanks a lot.

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qbteachmt
Level 15

From: https://www.irs.gov/instructions/i5329#idm139986644641968

Line 23:

You can withdraw some or all of your excess contributions for 2020 and they will be treated as not having been contributed if:

  • You make the withdrawal by the due date, including extensions, of your 2020 tax return; and

  • You withdraw any earnings on the withdrawn contributions and include the earnings in gross income (see the Instructions for Form 8606 for details). Also, if you hadn’t reached age 59½ at the time of the withdrawal, include the earnings as an early distribution on line 1 of Form 5329 for the year in which you report the earnings.

 

Here:

https://www.taxact.com/support/1280/2016/ira-or-roth-ira-excess-contributions

 

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puravidapto
Level 7

Got it. I do not think the code matters as long as it: (a) adds the earnings to income; (b) triggers the 10% penalty. Both code 1 and 8 will do it. I do not think the IRS sees the code. Thanks a lot!

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rbynaker
Level 13

Sounds like you nailed it.  I appreciate you posting your findings.

FWIW, In ProSeries you would enter the 1099-R with the code P in 2020 and scroll down a little to check a box that says something like "2021 1099-R w/code P for 2020".  Then everything magically works.  In Lacerte/PTO I would use your approach and just code it to what gives me the desired result.  Taxable income + penalty.  Job done, move on.

Some people prefer to wait and amend once the 2021 1099-R code P shows up 13 months later.  I'm always proactive, often on the phone with the IRA custodian & client getting the actual numbers that the custodian will be reporting under which codes in the future years.  But more often than not, I'm the one who discovers that there's been an excess contribution so I try to follow through since many clients are not even going to understand what needs to be done.  Since we're talking about Bill Murray films today, I'd rather avoid a Lost in Translation situation. 🙂

Rick

puravidapto
Level 7

@rbynaker wrote:

Some people prefer to wait and amend once the 2021 1099-R code P shows up 13 months later. 


Some people may want to collect a second preparation fee.

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2004taxfile1
Level 1

Did you receive 1099-R forms for this 2020 over contribution in 2021? 

I have similar case without 1099-R (should receive it in 2022). 

Can I file correction for it now (by April 15, 2021).?

thanks

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qbteachmt
Level 15

@2004taxfile1 

You don't file as the correction; you Correct it, and as long as you did that before the filing due date (which is May 17), it's as if it never happened.

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2004taxfile1
Level 1

@qbteachmt 

thank you for your advise!

I entered a 1099-R from Wages and Income section > IRA, 401(k), Pension Plan Withdrawals (1099-R)  > Add another 1099-R for my 2020 excess Roth IRA contribution.

Enter $7677 in box 1 as Gross distribution;

Entered $677 in box 2a for taxable amount,

For box 2b: Checked  box for Total distribution is checked.

Select P as distribution code. Entered State and State No.

Did not enter or select anything else. Finished.

After this is done, Federal Tax estimate increases about $1000, but taxable amt is only  $677,

Not sure what I did wrong? Please help, thank you!

.

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abctax55
Level 15

@puravidapto 

"...Some people may want to collect a second preparation fee."

THAT comment is rude, unprofessional, and completely uncalled for.  You owe Rick an apology.

"Tax software is no substitute for a professional tax preparer"
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qbteachmt
Level 15

@2004taxfile1 

You really should start your own topic so that you include your specifics. You stated you have a "similar" issue. Now you told us you checkmarked this was a Total Distribution, which means that account is Closed.

What did you mean by "my 2020 excess"" Are you working on your Client's tax return? Are you using ProConnect?

Are you lost on the internet?

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte , and you may be looking for support as an individual taxpayer. Please visit the TurboTax Help site for support.

Thanks.

 

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puravidapto
Level 7

@abctax55 wrote:

@puravidapto 

"...Some people may want to collect a second preparation fee."

THAT comment is rude, unprofessional, and completely uncalled for.  You owe Rick an apology.


I did not notice the reply until today. That comment was made in a non-serious joking manner, I apologize that you did not find it funny.

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Claud Ge
Level 1

I have the same situation, I am not sure where to report the withdrawn interest on the excess contribution. 

If I wait for the 1099R next year, does that mean that I need to file an amended return for 2020?

Is there a way to avoid that?

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qbteachmt
Level 15

The point would be to remove it Timely, so that it doesn't become a problem. You don't want to report it, because that removes the timeliness from the activity. When the 1099-R comes out for 2021, it will be flagged for code = Previous year. You report it for 2020. You also will report any removed earnings for 2021, because the removal happens in 2021. The removal of the contribution only happens once; the earnings are taxed in both years, or for as long as they are not removed.

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MikeR111
Level 1

Hi All,

Thank you for this discussion as I have the very same issue, and it has been very confusing trying to determine how to report computed earnings without a 1099.  Cleint made excess contributions for 2019. 2020, and foru months of 2021 thus far.  We have corrected all of these contributions, as well as earnings, by withdrawing funds from the ROTH.  I understand that we will report the excess contribution for 2019 on Form 5329 and pay the 6% penalty.  However, for 2020 and 2021, we have corrected it in a "timely manner" and will only owe taxes on the computed earnings, which the custodian (TRPrice) has provided us, but again, we have no 1099 for 2020 as yet, since the funds just came out a few days ago.  As I have followed this discussion, I think that I understand that the earnings will not be reported on 2020's return, but next year, 2021, when we have a 1099 showing the distribution and earnings.  Do I have this right?  Thanking you in advance for any guidance.

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qbteachmt
Level 15

"we have no 1099 for 2020 as yet,"

You won't get one; you have 2021 distribution, not 2020.

Make sure, @MikeR111 to Edit your reply and Remove all of the identifiers you place on this public internet forum, where you can now be subject to scammers.

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MikeR111
Level 1

Thanks for your reply,  Yes, I will make sure to do that.

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dshickly
Level 1

How are you reporting the earnings on the excess contribution?  I too have gotten the earnings on the excess contribution information as well as the taxes withheld. I am inclined to use Form 4852 (substitute W-2/1099-R) but not sure if that is correct.  The payer won't issue 1099-R until 2021 but the earnings withdrawn need to be reported on 2020.  I would rather not file an amended return later especially since I have the correct information

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dshickly
Level 1

No. We have been told the 1099-R will not be issued until 2022.

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qbteachmt
Level 15

You won't use Form 4852. You will get the real 1099-R for 2021 activities in 2022.

"but the earnings withdrawn need to be reported on 2020."

If you are filing 2020, but the corrective distribution didn't happen until 2021, then you have reportable taxable earnings for 2020 and you deal with the excess contribution (if that also applies) but you don't have a "withdrawn" condition and you will have the 2020 earnings amount, not the Withdrawn 2021 amount earnings, as taxable (it's taxed for each year). That doesn't go on a 1099-R or any substitute. That is Form 5329:

https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-form-5329-additional-taxes-on-qualified-r...

https://www.irs.gov/forms-pubs/about-form-5329

It isn't clear if you also need Form 8606; it isn't clear if this is Trad IRA, Roth, nondeductible Trad IRA, backdoor Roth, etc.

I have found the consumer-oriented articles much easier to use than the IRS, for initial review of what applies. I like investopedia's articles.

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Toad
Level 1

In January 2020, my wife and I each contributed an amount ($7000 each) to our Roth IRA accounts for tax year 2020. In early 2021, I realized we each had an excess contribution (excess = $4340 each) due to our AGI limiting our Roth contribution amount to $2660 each. So we withdrew the excess amount plus earnings in early 2021 ($4659 for me, $4936 for my wife). What I did not realize at the time was this is to be taxed in the year of the contribution (2020), not the year of the withdrawal (2021). In early 2022, I was preparing an amended 2020 tax return with TurboTax to resolve the problem. However, because we had taxable earnings of $915, our 2020 AGI increased by $915, which in turn lowered our contribution limit for 2020 for each of us from $2660 to $2220 ($440 dollars). Therefore, we each now have an excess contribution for year 2020 of $440 because the Roth contribution limit changed. We each had to pay the 6% penalty for the $440. So the issue was improved, but not resolved. I am not sure how to resolve this issue. I suppose one way is to withdraw $440, plus earnings on the $440, plus some additional amount which will put us below the new limit (moving target), and file a second amended return for 2020 next year. Any advice on the best way to resolve this?

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qbteachmt
Level 15

@Toad 

"I was preparing an amended 2020 tax return with TurboTax to resolve the problem"

Uh...

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer using TurboTax. Please visit the TurboTax Help site for support.

Your sign in user info here is the same one you can use over at the TurboTax forum.

Thanks.

 

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Toad
Level 1

My apologies for posting on wrong site.

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Thank you for your explanation. 

In this scenario, can you please answer the following questions?

1. My understanding is we don't to report the deposit amount withdrawn as withdrawal happened before return filing date (April 18)

2. we need to report earnings and pay taxes /10% penalty on excess earnings. we need to report in 5329 and gross earnings on 1040 forms. does the rollover from form 8606?

3. how should and which line number the excess earnings  should be reported on form 8606 ?

 

 

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qbteachmt
Level 15

@looktofilebetter 

Did you use the links already provided in this topic? Click the resources offered that should help you with your questions.

https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-form-5329-additional-taxes-on-qualified-r...

https://www.irs.gov/forms-pubs/about-form-5329

If you remove Excess contributions made for a specific tax year, by the due date of the tax return for that specific tax year, you can treat the contribution as if that didn't happen. Any earnings on that specific amount will also need to be removed, to avoid paying the additional 6% excise tax on these earnings. And the removal of these earnings then falls under the penalty (if the taxpayer is not at least 59 1/2, if this is a Roth account and there has not been a Roth account for 5-years, etc) and it is subject to income taxes (as it is income not yet taxed). The earnings are reportable for the Tax year of the Excess Contribution, since they are earned on that amount.

You don't get a 1099-R until it comes out for the year the Removal got made. It doesn't matter if you put in 2021 contributions in 2021, or by the filing of the tax form in 2022, as long as you also removed Excess of tax year 2021 by the filing date for the 2021 tax return. That means the 1099-R will come out in 2022 marked as applicable to the prior tax year, if you don't remove it before the end of 2021.

Excess contributions have nothing to do with Rollovers. Rollovers are not New money. They are the movement of money. Contributions are New money.

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Thank you -

understand that 1099-R is not available.

but how and in which form should I report the earning part of Excess ROTH removal? will this earning goes under 8606 -line 19 or something else?

I understand we need to pay a 10% penalty part 5329 form on excess as I am under 59.5 age and amount contributed part of 2021?

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qbteachmt
Level 15

Are you using ProConnect to prepare your clients' tax return? Because this is a ProConnect Program User's forum.

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memusic2002
Level 1

Follow up to this question

For 2021, I made $2400 in Roth Contributions in 2021 for the 2021 Tax Year.   In 2022, I made $200 in Roth IRA Contributions for the 2021 Tax Year for a total of $2600 in Roth contributions for the 2021 Tax Year, split into 2400 during Calendar 2021 and 2022 in Calendar 2022 but all for the 2021 tax year.  I filed an extension and my brokerage account refunded my excess contributions with earnings split into two payments.  One related to the $2400 plus earnings and one related to the $200 minus loss.  The 2400 has net income/earnings while the 200 did not.  

Do I report the earnings on my 2021 Return even though the calculations were done in April 2022.  And do I deal with the $200 in next years return which was actually a $20 loss.  The brokerage said I will receive a 1099 next year but nothing now which I thought was odd.  I just thought it was odd to get a 1099 for something I would have already reported in a prior year.  Any input appreciated. Thanks  

I didnt realize I was over for the Roth until I was preparing my tax return in early April as I had some capital gains that put me over.  

 

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qbteachmt
Level 15

@memusic2002 

You can certainly read anything on the internet, including everything in this topic which will answer most of what you asked, so keep reviewing it and take notes. But...you don't seem to be asking how to use ProConnect to prepare your client's tax return. This is not a Tax Assistance community. No one here can help you with a personal tax issue.

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer using TurboTax. Please visit the TurboTax Help site for support.

And try this screen, for the various topics (subforums): https://ttlc.intuit.com/community/discussions/discussion/03/302

Your sign in user info here is the same one you can use over at the TurboTax forum.

Thanks.

 

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memusic2002
Level 1
  • Thanks.  I guess I was lost.  Take care
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