Earnings on Excess Roth IRA

[Username is two words]

The taxpayer contributed $6,000 to a Roth in 2021. It turns out that $3,370 of this is excess.  She will withdraw it, and its earnings by the due date of the return, but then as I understand it, the earnings are taxable income in 2021 subject to the 10% penalty.

If we assume she will be allowed a partial Roth contribution in 2022, can she leave the earnings in it and avoid reporting them as income and incurring the penalty?

If not, how do I report the earnings in ProSeries Professional?  There is no 1099R for 2021.

Thank you.

[qbteachmt]

You can read the publications from the IRS, and/or use consumer resources, such as google this:

roth ira excess contribution removal

Removal before the due date of the return is how you avoid penalties; it's as if that never happened. That isn't going to avoid tax on earnings when earnings were made on the excess. And you might be thinking of how you can designate excess contribution as applicable to the upcoming (current) tax year, but earnings are not contributions; you cannot withdraw excess contribution and leave earnings as if they are the contribution.

[rbynaker]

I always have a conversation (3-way call) with the client and the IRA custodian.  The custodian should be able to tell you what amounts are going to be on the 2022 1099-R with code P (indicating that it's taxable in 2021).  They can also tell you the EIN if you don't already have it.

Enter that into a 2021 1099-R Wks, scroll down a bit and there's a checkbox for "2022 1099-R with Code P" or something like that.

For a Roth the earnings will be taxable and subject to penalty (but it probably won't be much).

Rick

[Username is two words]

Thanks, yes, that was my conclusion also.  Actually, as far the 2022 contribution, we have given up on the idea of determining if she will be allowed one.  Too uncertain.

[Username is two words]

Thanks Rick, I will give that a try!  I was concerned about using a 100R worksheet when we don't really have a 1099R, when it will come next year.  That some matching problem will be set off.  Hopefully what you say will produce the right result.  I'll let you know.

[sjrcpa]

"That some matching problem will be set off."

The matching program doesn't care if you report more income than is on 1099s. Only if you report less.

[Username is two words]

I tried using a Code P but don't get the right result.  Code P makes it taxable in the prior year.  I tried Code J, the early distribution code for a Roth which also didn't work.  The only way I could get the amount to be included as taxable income and subject to the 10% penalty was to use code 1, for a traditional IRA. This result of this was to include the amount in income, make it subject to the penalty, but it also increased the excess Roth. Still trying...

[rbynaker]

Was there a checkbox on 1099-R Wks page 2 to tell the software that the 1099-R will be in 2022?  Maybe A 5 (unless they've moved it).

[qbteachmt]

You would be able to leave earnings that are allocated to the allowable contribution, but take out the excess contribution and the amount of earnings on that contribution. The Earnings distribution is taxable income and it might also be Early, subject to penalty on Form 5329. Have you read those instructions:

"You can withdraw some or all of your excess contributions for 2021 and they will be treated as not having been contributed if:

• You make the withdrawal by the due date, including extensions, of your 2021 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."

The 1099-R will come for 2022 and be marked as Prior Year.

[Username is two words]

Hi, yes I know the rule, I am trying to get the right results in Pro Series.  The earnings on the excess contributions should be included in income and subject to the 10% penalty.  So far I have not been able to get that result.  I know a 1099R will come next year saying there is taxable income in 2021.  I'd just as soon report it now, on the 2021 return, rather than having to amend.  

So far I can't get this result.

[Username is two words]

Thanks, yes, I've tried that box but so far I have not been able to find a combination of codes that produces the right result and doesn't give me an error message.  But thanks for the suggestion.

[qbteachmt]

"not been able to find a combination of codes"

You mark that the earnings are Early Distribution, if that applies to your taxpayer. That makes it subject to penalty. Otherwise, it is only subject to income tax.