ROTH CONTRIBUTION RECHARACTERIZED BEFORE DUE DATE OF RETURN

[DebiHCPA]

My client funded a Roth in 2022 and could not make a Roth contribution so they have withdrawn it with $165 of earnings. I want to show this on the 2022 return because they will receive a 1099R for 2023 that will put the income back into 2022. Can't figure out which code to use on the 1099R input sheet.  If I put the gross distribution of $6166 in box 1 of 1099R and $166 in box 2a with a code in box 7 of 8 then it brings the income in as earnings on Form 1040 line 1 h. Just not sure that is the proper treatment. Ultimately perhaps it doesn't matter but just wondering if anyone else has dealt with this.

[qbteachmt]

"I want to show this on the 2022 return"

Most common would be 8 and J.

8 is used with code (if applicable): 1, 2, 4, B, or J.

See this article:

https://proconnect.intuit.com/support/en-us/help-article/insurance-medical-benefits/understanding-fo...

Don't forget if there is early distribution penalty, if the person is under 59 1/2, etc. Form 8606 for basis, form 5329:

https://proconnect.intuit.com/support/en-us/help-article/federal-taxes/entering-form-1099-r-proserie...

[DebiHCPA]

The problem is there is not a choice for trying to correct this before the return is filed. I will have to force the program to come out with the correct solution.

[rbynaker]

I always have to look this up.  First I'm going to pick on you about terminology.  This doesn't sound like a recharacterization.  That's when you get to "rewrite history" and pretend this went into a Traditional IRA instead of a Roth (or vice versa).  Sounds like what you have is a corrective distribution.

If you're lucky you can get the broker to tell you what 1099(s) they're going to issue and what amounts and codes they're going to put on them.  If this is a 2023 1099-R with a code P for $6,166 / $166 then go ahead and enter it in 2022 so you don't have to amend later.  As Michelle said, there might be a penalty on the earnings.  I *think* that's what I would expect (because the excess contribution was made in 2022) but peruse the 1099-R instructions to see if you can figure out if this should be taxable in 2022 or 2023.

The other alternative is a 2023 1099-R with a code 8 which is taxable in 2023.  I *think* that's what happens when you make a Jan 2023 excess Roth IRA contribution but designate it for 2022, then fix it in March 2023.  But it's April 6th and I reserve the right to be remembering this all wrong. 🙂

Rick

[rbynaker]

For data entry, if it's going to be a 2023 1099-R with a code P enter it in 2022 as a 2022 code P and scroll down a wee bit to check the box for "2023 1099 received with code P" (or something like that) and it should work like magic.

Edit: It used to be box A 5, maybe it still is.

[qbteachmt]

It's not recharacterized. It's a corrective distribution.

"enter it in 2022 as a 2022 code P"

That is Prior Year, which would be 2021. For Roth, the entire contribution is moot, but you have to deal with the taxable earnings.

https://www.irs.gov/instructions/i1099r#en_US_2023_publink100021668

[DebiHCPA]

When I do that the program thinks I am going to go back to 2021 and amend. I am trying to avoid amending 2022. I believe since taxpayer is under 59 there is a 10% penalty on the earnings.

[qbteachmt]

Are you still confused?

"When I do that the program thinks I am going to go back to 2021 and amend."

That's why you won't use P, this year. P applies next year.

"I am trying to avoid amending 2022."

You are just now preparing to file it for the first time, right?

"I believe since taxpayer is under 59 there is a 10% penalty on the earnings."

That's why J is used. "J - Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1/2)." That's why Form 5329 is also going to be used.

[DebiHCPA]

I am going to revisit this again. Had to put it down. I can get it to work but I am not sure if it is being reported in the correct place. It will be a code R per the retirement dept of Fidelity. There should be a penalty but I will request a waiver. There must be somewhere in the program to make this work - just have to keep scrolling. Might go back to the input sheet of the contribution and see if it is there. Will let the group know when I find the proper resolution for the current year.

[qbteachmt]

"It will be a code R per the retirement dept of Fidelity."

That is only true if you really stated this incorrectly in the description, but correctly in your title. You stated conflicting terminology:

Title = "ROTH CONTRIBUTION RECHARACTERIZED BEFORE DUE DATE OF RETURN"

Description = "so they have withdrawn it with $165 of earnings"

Did they recharacterize it from Roth to Traditional, or did they take it out?

"Use code R for a recharacterization of an IRA contribution made for [prior tax year] and recharacterized in [current tax year] to another type of IRA by a trustee-to-trustee transfer or with the same trustee."

Ask them where the money went.

[DebiHCPA]

This is what I did:

1. IRA contribution worksheet - line 19 $6000, line 25 6000.

2. 1099R worksheet - Line 1 - Gross dist 6166, line 2a - taxable. Had to make distribution code equal to 1. Checking any combination of the boxes on A1 to A5 did not work.

3. Form 5329 - put the taxable on line 1 code U - corrective distributions made on or after 12/29/22.

Result was 5a Form 1050 - $6166, 5b $166 and no penalty.

Best I can do within the confines of the program. Called the support line but they had no answer.

I believe this is the proper result. Let me know if someone thinks I am wrong.

[qbteachmt]

Are you sure there is a penalty?

https://www.investopedia.com/what-to-do-if-you-contribute-too-much-to-your-roth-ira-4770686

"1. Withdraw Your Excess Contributions

You won't face any penalties if you simply withdraw your excess contribution—plus any income it has earned in the meantime—by the due date for your tax return, including extensions. You will, however, have to include the earnings portion in your taxable income for the year."

Because some of the points here are conflicting, I can only give resources for you to read, so that you evaluate what applies specifically. Specifically, a recharacterization is not a corrective distribution of excess, and a distribution is not a recharacterization.

I really like investopedia articles, since they are plainly written. All of the IRA brokerages provide similar info to the consumer, though.

I would not trust what Fidelity told you, if you didn't state it properly for the situation. Even when you are able to explain what happened, they still can get it wrong. I have a client who got an apology gift from Schwab for how badly they screwed up some IRA and inheritance issues. It still isn't right, but I'll let the IRS take it up with Schwab directly, if that ever comes up.

[DebiHCPA]

The problem is with the software. The withdrawal of the excess contribution is not taxable. The earnings are taxable. IRS first says put it on Form 1040 1 h but then on 1 h it says don't put excess contributions on this line - put it on 4. This is not an uncommon scenario although most people probably don't see the 5498's when preparing the return and would not think to ask the client about it. Perfect storm of facts which caused this to not be taxable. The income will be on the return - just maybe not on the perfect line. One simple item taking hours....

[qbteachmt]

The contribution is moot and does not appear on the 1040, because it is removed in the timeframe as allowed to be as if it never happened. It's not an issue with the software and the IRS doesn't want you to report the contribution if it was removed by distribution. If it was recharacterized then it would be reported as if that was the initial contribution. Only the earnings are reportable and taxable.

Are you using the links I have been providing? Here is the Help article, again:

https://proconnect.intuit.com/support/en-us/help-article/federal-taxes/entering-form-1099-r-proserie...

[qbteachmt]

I stopped in one more time to see if you resolved this (as excess or is it recharacterization? I'm still confused on this point) as you seem to have gone out into the weeds overthinking it.

For Excess Roth, removed by the deadline, using the 1099-R worksheet:

Box 1 Total Amount: Amount of entire return of excess contributions including earnings (gross)
Box 2a Taxable Amount: Just the amount of the earnings
Box 4 Federal Income Tax Withheld: 0 (assumes there was nothing withheld)
Box 7 Distribution Codes: 8 J

Contribution is moot, as if it never happened.

[rbynaker]

I'm still not sure what happened at this point.  Either you have a corrective distribution or you have a recharacterization.  If you're saying Fidelity will issue a 1099-R code R then you have a recharacterization and you'd just report a $6K contribution to a traditional IRA, which will either be deductible, or non-deductible, or perhaps excess if there is no earned income.  The earnings would need to be transferred as part of the recharacterization BUT they're treated as if they were earned within the traditional IRA (so tax deferred until withdrawn.)

So we really have to circle back to Michelle's point:  Ask them where the money went.

[DebiHCPA]

Client decides without asking me that he wants to contribute to a ROTH IRA. I see the 5498. I input the $6000 into the program and there is a penalty - can't do a ROTH - income too high. Taxpayer calls Fidelity and asks them to return the money, it was an excessive contribution. They return the money with a letter that says we are returning the $6000 plus $166 of earnings which will be taxable on the 2022 return. We will send you a 1099R next year but you will need to correct 2022. 2022 is not finished so now I want to pretend that I have that 1099R and fix it now in the program. So I am just trying to fix it now. I think I have it fixed with various suggestions. Thanks.

[rbynaker]

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@DebiHCPA wrote:

Client decides without asking me that he wants to contribute to a ROTH IRA. I see the 5498. I input the $6000 into the program and there is a penalty - can't do a ROTH - income too high. Taxpayer calls Fidelity and asks them to return the money, it was an excessive contribution. They return the money with a letter that says we are returning the $6000 plus $166 of earnings which will be taxable on the 2022 return. We will send you a 1099R next year but you will need to correct 2022. 2022 is not finished so now I want to pretend that I have that 1099R and fix it now in the program. So I am just trying to fix it now. I think I have it fixed with various suggestions. Thanks.

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This is what I originally assumed was the fact pattern but then you introduced this information:

"It will be a code R per the retirement dept of Fidelity."

That suggests that someone at Fidelity thinks this was a recharacterization.  Since they're the ones pushing the buttons, IMO they are a more reliable source of information than "what the client thinks happened."  Maybe your clients are smarter than mine but I still have one client who swears the only thing he has at Primerica is an IRA.  Yet every year he gets a 1099-DIV (in addition to a 5498, so yes, one of the things he has there is an IRA).  Probably because the promoter CONvinced him to open multiple accounts, one was an IRA and another was a taxable account.

So we circle back to what happened to the money?  I think we all agree that it came OUT of the Roth IRA account.  Did it go to the client to deposit into their checking account (corrective distribution)?  Did it get transferred to a taxable brokerage account at Fidelity (corrective distribution)?  Did it get transferred into a Traditional IRA at Fidelity (recharacterization)?  Or any number of other possibilities.

It's entirely possible that contacting Fidelity again will yield a completely different answer about what code(s) will appear on the 1099-R.  I've had terrible experiences with the "front line" phone people at Vanguard.  Some of them are barely qualified to answer a phone, let alone discuss retirement options.  So the professional skeptic in me says "stop the presses" so we can go get facts that actually align with each other.

[qbteachmt]

"That suggests that someone at Fidelity thinks this was a recharacterization. Since they're the ones pushing the buttons, IMO they are a more reliable source of information than "what the client thinks happened.""

I take the opposite position...When you talk to these brokerage people and describe what you think happened, you get the answer based on that discussion. It's not based on the reality of the situation, and many times, the issuer of the 1099-R (for money out) has no idea what happened next or why the money was taken or if the taxpayer has another Roth that meets a 5-year requirement but this one under their management did not, etc.

If the money and earnings were distributed to the taxpayer, and if they did not put it into another IRA-type of account, then it would be treated as a corrective distribution. That's a lot of "if"s, but at some point the taxpayer needs to help explain their own reality.

[DebiHCPA]

If I know what has to go on the return somewhere then I make it happen. It will be on the return and there will not be a penalty and I will deal with any notices if they come in a few years. Maybe one day there will be a proper code on this input sheet. Until then I will make it right.

Thanks for all of the responses. 

[chenschuh]

I think you have to call Fidelity to withdraw Roth IRA contribution before due date of return, the financial institute will tell you how much was the interest income. Then you have to go to IRA contributions worksheet, enter 6000 on Ln 25.

1099R will show only interest 166 on box1 and 2a, box 7 with code 1

[DebiHCPA]

Since I don't have the 1099R for 2023 this is a guessing game. I have put the full distribution in box 1 and the taxable earnings in 2a.

For the distribution codes, I have changed this so many time. My latest and will be my final answer is 8T. That works - puts it on 4a and 4b, I have waived any penalty. So hopefully this is somewhat correct because I am going to put this return to rest. Done!

[qbteachmt]

"Since I don't have the 1099R for 2023 this is a guessing game."

Plenty of people posted what to do and how to do it, and I put it here more than once: Box 7 Distribution Codes: 8 J

"I have put the full distribution in box 1 and the taxable earnings in 2a."

Yes, the 2023 1099-R might come up with a 1, because the issuer doesn't necessarily know the full picture. For instance, requesting a distribution for purposes of corrective action and/or rollover, isn't always part of what the issuer knows. The tax prep is entered for what happened as the total event.

"For the distribution codes, I have changed this so many time. My latest and will be my final answer is 8T."

I don't know if you used any of the reference links I provided?

"T - Roth IRA distribution, exception applies

Use code T for a distribution from a Roth IRA if you do not know if the 5-year holding period has been met but:

• The participant has reached age 59 and 1/2
• The participant died, or
• The participant is disabled.

*Used with code (if applicable): None"

"Use code J for a distribution from a Roth IRA when code Q or code T doesn't apply. But use code 2 for an IRS levy and code 5 for a prohibited transaction.

*Used with code (if applicable): 8 or P"

"I have waived any penalty."

The IRS waives the penalty, if it applies. The tax form includes application to request the waiver.

You're signing the form as preparer, so you do what applies. You know your client's age.

[DebiHCPA]

Whether you put J or T it is the same result. I attached a letter of explanation. It is crazy that excess contribution is not one of the choices. Sometimes we have to make the program produce the correct result. Per the publications this is the correct result. 

Thanks for the suggestions though.

[qbteachmt]

"It is crazy that excess contribution is not one of the choices."

What? I keep using the links I gave, and that is explained in the very first one I provided as a reply two days ago:

https://proconnect.intuit.com/support/en-us/help-article/insurance-medical-benefits/understanding-fo...

"8 - Excess contributions plus earnings/excess deferrals taxable in 20YY [current tax year]

Use code 8 for an IRA distribution under section 408(d)(4), unless code P applies.

• Also, use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless code P applies.
• Refer to Corrective distributions on page 6 and IRA Revocation or Account Closure on page 3 for more information.

*Used with code (if applicable): 1, 2, 4, B, or J."

Which is why I offered it to you to read about. You should use references offered. It might save you from going in circles next time.