Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

Excess Roth IRA contribution withdrawn: where to report the earnings?

Level 5

A 30 years old client made a Roth IRA contribution 6000 in 0815/2020 for the year 2020, later she found the error and withdrawn the contribution plus earning 500 in 01/15/2021, no forms issued.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

--
Click this link to vote. Like many good things in life, we have to fight for them.
Labels (1)
1 Solution

Accepted Solutions
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"How to treat withdrawn interest or other income.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."

 

*******************************
"Level Up" is a gaming function, not a real life function.

View solution in original post

8 Replies 8
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♥¸¸.•*¨*•♫♪
Level 5

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?
--
Click this link to vote. Like many good things in life, we have to fight for them.
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."

 

*******************************
"Level Up" is a gaming function, not a real life function.

View solution in original post

Level 5

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.

--
Click this link to vote. Like many good things in life, we have to fight for them.
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

 

*******************************
"Level Up" is a gaming function, not a real life function.
Level 5

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!

--
Click this link to vote. Like many good things in life, we have to fight for them.
Level 11

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

Level 5

@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.

--
Click this link to vote. Like many good things in life, we have to fight for them.
0 Cheers