Reporting Earnings on excess Roth Contribution withdrawn

[Rich51]

My client received a 1099-R Code J - Early Distribution From a Roth IRA.  The distribution was for an excess contribution in 2019 and reported on the 2021 1099-R  with 6,000 in Box 1 and 0 taxable in Box 2A.

The broker advises that the 6,000 is a return of contribution all basis so non taxable.  However the broker stated in an email that this 6,000 had 1,110 in earnings attributed to it.  I told them the earnings need to be reported on the 1099 and to what year they are related to - in  this case 2019.  The broker still maintains that these earnings are not taxable and can be retained/not reported relying on a statement on the H&R site reference this issue which I will post the link to here.  They are claiming that bullet #3 "After the Extended Due Date of Your Return"  the last line there stated "you do not need to remove any earnings made on the excess".  They are implying those earnings can remain in the account based  on this last section and sentence because it is "After the due date of the return" as opposed to bullets 1 and 2 where you report the earnings.  

[qbteachmt]

"was for an excess contribution in 2019 and reported on the 2021 1099-R"

The contribution in 2019 was for tax year 2019 or 2018 (made by the due date of that return)?

"The broker advises that the 6,000 is a return of contribution all basis so non taxable."

Unfortunately, that is not true this late in the game. Read this:

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

If it was removed in the timeframe to make it moot, that would be true. Not true now.

[qbteachmt]

Oh: time for a new broker/advisor.

[Rich51]

Thank You.  I might have not articulated my problem correctly.  I know the excise penalty comes into play.  

My question is on the earnings on the withdrawn excess contribution.  The excess contr was in 2019 and all 6K contributions were withdrawn in 21 to relieve the excess contr which was all basis being roth.  I maintain that the earnings on that withdrawn contr are taxable in 2019 (as I understand IRS instructions) and are subject to the 10% withdrawal penalty.   The broker maintains the earnings are not "taxable" and need not be reported because of that sentence in the HR Block link I sent.  

I believe the earnings are a taxable event even if they leave them in the account.  Thanks for helping  Rich

[qbteachmt]

"They are implying those earnings can remain in the account based on this last section and sentence because it is "After the due date of the return" as opposed to bullets 1 and 2 where you report the earnings."

The broker is only partially right. It's risky, though.

There is a strategy out there to go ahead and make this type of contribution knowing you will suffer the 6% excise tax, because there is the assumption you will make more than this in the earnings of that account, which will be tax free earnings.

https://www.irafinancialgroup.com/learn-more/self-directed-ira/roth-ira/excess-roth-ira-contribution...

"Hence, the excess Roth IRA contribution strategy is based on the notion that paying a 6% tax on excess contributions to a Roth IRA, while gaining the tax advantage of having the earnings from the excess contribution remain in the Roth IRA so it can grow tax-free, is a great deal compared to making the same investment with personal funds and having to pay income tax on the earnings and gains."

The IRS reference: https://www.irs.gov/publications/p590a#en_US_2021_publink1000231025

"I maintain that the earnings on that withdrawn contr are taxable in 2019 (as I understand IRS instructions) and are subject to the 10% withdrawal penalty."

There is no early withdrawal penalty unless there is a withdrawal.

Nothing was withdrawn in 2019 or 2020, and the earnings still have not been withdrawn, it seems. Anything withdrawn will be part of the 1099-R year of that event. You stated that in 2021 the $6k in, is what was removed. When there is a distribution, then if early distribution (not 59 1/2, or not meeting one of the 5 year rules) penalty applies, that will be in the tax year the earnings are removed.

"because of that sentence in the HR Block link I sent."

Sent where? This is a Topic on an internet community discussion forum; you might be getting email, because you might have set your profile to flag you with a notification that the topic has been updated. Using your web browser, come to your topic, here:

https://proconnect.intuit.com/community/tax-talk/discussion/re-reporting-earnings-on-excess-roth-con...

I think you are referring to:

https://ttlc.intuit.com/community/retirement/discussion/multiple-years-of-roth-ira-excess-contributi...

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

“Withdraw the excess the following year

Another option for those who didn't correct their mistake before the tax deadline in the year they made an excess contribution is to withdraw it next year. If you do this, you have to take out only the contribution, not any earnings. You'll pay the 6% excise tax for the year you left the excess contribution in your account, but you won't have to worry about this tax in future years.

The government charges you ordinary income tax when you withdraw these excess contributions, even though you already paid taxes on this income the year you earned it. It'll also charge you a 10% early withdrawal penalty if you're under 59 1/2, so this isn't always an affordable way to fix your problem.”

"to relieve the excess contr which was all basis being roth"

But that corrective deadline has been missed. Try this: https://www.thetaxadviser.com/issues/2020/apr/correcting-excess-contributions-iras.html

From the part that is "Ordinary distributions from Roth IRAs" about 2/3 down.

And another IRS reference: https://www.irs.gov/pub/irs-pdf/i5329.pdf

Part IV.