Withdrawal of excess Roth IRA contribution

[jskouberdis]

I have a question to ask the community about an excess Roth contribution.  I have a client that between them and their spouse made over the Roth IRA income limits for 2022.  I discovered that when preparing their tax returns.  They went to their IRA custodian and withdrew the funds.  They discovered that they had a $500 loss between the two of them so they withdrew $11,500 of their $12,000 initial contributions.  At their income level I believe the $500 loss will not be deductible as miscellaneous itemized deduction since the 2% floor to deduct misc. item. deduct. at $223,000 is $4460 and the $500 is the only misc. item. deduct. that they have.  My question is will they get a 1099 this year showing the distribution for 2022 or will it happen in 2023 with a prior year code. If I get a 1099-R this year will I have to explain that they had a loss and they had basis in the Roth IRA.  I just handle average people who don't make a lot of money and I have never encountered this in the past.  Also when I entered on the Roth IRA contribution worksheet that they each withdrew the $6000 contribution to the Roth account it eliminated the 6% penalty which is what I wanted.  My other question is should I report with the return as a miscellaneous note that they withdrew their contribution to the Roth account because the IRS may see on the 5498 that they contributed to the Roth or will the 5498 say zero because they took the contriubution out before 4-15-23.  

[qbteachmt]

This needs to be picked apart a bit.

Yes, if you remove the excess by the due date of the return for the same year as the contributions, you have no excise penalty (the 6% on excess). You still use Form 5389 when there are other considerations such as early withdrawal; and Form 8606 for issues such as basis and earnings, as applicable.

They needed to each take out their excess from the same account(s) they put it into. It's not like RMD and can't be combined across people or account type(s).

I like, for instance:

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

The loss is not deductible:

https://www.investopedia.com/articles/retirement/05/012505.asp

I don't know that losing $500 means taking out $500 less (unless that's the only amount they ever put in or had in those accounts). They have to do the math for overall allocation. Did they make that leap, or do the math? They have to be able to attribute the loss accordingly, otherwise.

https://www.investopedia.com/net-income-attributable-definition-5223368

https://www.investopedia.com/articles/retirement/04/042804.asp

Yes, there will be a 1099-R for 2023, and it might or might not be coded P for Prior year, but you all know that's what it will be, and reported for 2022.

Don't overlook Pub 590-B.

[jskouberdis]

Thanks for responding.  The taxpayers withdrew their contributions from the total of their Roth's they only each had one Roth.  From what I was reading you could take it as a misc. item ded. subjec to 2% but from the article you had a link to they said that IRA losses whether Roth or Traditional were suspended until 2026.  Should I report what they received in 2022 now when I file their return and show zero as taxable with a code of 8.  Or should I wait until 2023 when the 1099-R is received and do an amended return.  Or should I just do a footnote on the return for 2022 as to what happened or do I do a footnote for 2023?  This explains why I could not get the misc. item ded. to work because of the suspension of IRA losses.  Thanks for the information.

[qbteachmt · Accepted solution]

It's entered for tax year 2022, the same as if they got a 1099-R for it.

Don't forget to check the math for the allocation. That $500 might not be the allocatable loss, and there still is time to make another corrective distribution, should the math tell them otherwise. Or, they took too much and there is a small amount that will be taxed as earnings.

[jskouberdis]

Would I put the the amount they got back in box 1 and zero in box 2a and total distribution checked.  Along with an 8 code in box 7.  They taxpayer and spouse each only had one Roth IRA each and they received a letter from the broker who handles their accounts that they used IRS Notice 2000-39 to calculate the loss in their Excess Roth IRA contributions.  Should I attach these letters to the tax return or do some type note about the excess contribution.  Thanks for your help.

[jskouberdis]

Dear Qbteachmt,

So you recommend putting the return of the over contribution on 2022 rather than waiting and doing an amended return when I get the 1099-R in 2023.  Also do you recommend that I fill out the 1099-R worksheet the way that I suggested in my last post with the codes that I suggested and the numbers the way that I suggested.  I am just looking for some reassurance.  Most of my clients make under $200,000 a year so this is a first for me.  Looking forward to your opinion.

Thanks,

John

[qbteachmt]

Did you read Pub 590-B?

Why would you file incorrectly and your taxpayer incurs penalty, when it's being addressed in a timely manner? Why file wrong, then amend for what you already know?

Try this:

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

[jskouberdis]

You are correct.  I will file with the 2022 return and put on the 2022 1099-R Worksheet.  Are the codes and the way I mentioned to fill out the worksheet correct.  Please let me know.  Thanks for your help.

John

[qbteachmt]

"Are the codes and the way I mentioned to fill out the worksheet correct."

Are you not using the links I've been giving? There is even an Example (the ProSeries article seems written in the prior year and the Pub 590-B update still is in draft):

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

"Sometimes taxpayers will receive notice from their employers letting them know the transaction and amount in time for it to be reported in the original return, but otherwise, it will have to be amended later.

If the Form 1099-R  is a year 2022 form, you enter this in 2021."

https://www.irs.gov/pub/irs-pdf/p590a.pdf

"Under Chapter 2, page 42: "What if You Contribute Too Much?"

If this really was/were the only Roth account(s) ever and the only contribution ever, then they took lump sum and that would close the account(s). The net income would be negative, but you would still need to include it to show the gross excess was removed.

[jskouberdis]

This was the only Roth IRA they had and they lost $500 on it.  The way I am handling it is

Box 1A - $5500  net amount withdrawn

Box 2A -   -0-    Because they had a loss

Box 7 - codes  J & 8 Early distribution from a Roth & Return of contribution taxable in 2022

Roth Box is checked

On Roth contribution screen I have $6000 contributed line 23

Amount withdrawn before due date of return $6000 line 25

Line 27 - Total Roth Contributions - -0-

I am only asking for reassurance that I entered everything properly.

Thanks for replying

[qbteachmt]

I always follow the data to the final form.