Tax guidance - Excess Roth contribution situation (1 Viewer)

[Sleestak]

Any tax savants out there I could lean on?

In January 2021 I contributed $7k to my Roth.  Ditto my wife.  I was just running our 2021 taxes (married-filing-jointly) a few days ago, and Turbo Tax informed me we were not eligible to make Roth contributions in 2021.  I goofed, basically.  I plan to withdraw the contributions (I don't like the lifetime tracking burden imposed if I recharacterize, since I'd be mingling deductible and non-deductible IRAs).

The withdrawal process:  I know the size of the contributions ($7k each) and the gains those contributions saw (~ $1k each), from the January 2021 contribution time to now.  I have the paperwork to instruct my institution to perform the "distribution" for each of us.  The key is that this distribution will be in 2022.

My questions really begin here.  I have read that I will eventually get a 1099-R from my institution, but that I probably won't get this until it is too late to include in my 2021 taxes, which I plan to file by April.  How does this sequence of events usually go?

Do I make up my own 1099-R, and include it in my 2021 taxes?

Do I make no mention at all of this until the 1099-R shows up, and then file "corrected" 2021 taxes (say next January)?

Do I just wait until I'm filing my 2022 taxes to report the 1099-R?

Or is there some other way that this normally goes?

Thanks all!

 

[belljr]

Any tax savants out there I could lean on?

In January 2021 I contributed $7k to my Roth.  Ditto my wife.  I was just running our 2021 taxes (married-filing-jointly) a few days ago, and Turbo Tax informed me we were not eligible to make Roth contributions in 2021.  I goofed, basically.  I plan to withdraw the contributions (I don't like the lifetime tracking burden imposed if I recharacterize, since I'd be mingling deductible and non-deductible IRAs).

The withdrawal process:  I know the size of the contributions ($7k each) and the gains those contributions saw (~ $1k each), from the January 2021 contribution time to now.  I have the paperwork to instruct my institution to perform the "distribution" for each of us.  The key is that this distribution will be in 2022.

My questions really begin here.  I have read that I will eventually get a 1099-R from my institution, but that I probably won't get this until it is too late to include in my 2021 taxes, which I plan to file by April.  How does this sequence of events usually go?

Do I make up my own 1099-R, and include it in my 2021 taxes?

Do I make no mention at all of this until the 1099-R shows up, and then file "corrected" 2021 taxes (say next January)?

Do I just wait until I'm filing my 2022 taxes to report the 1099-R?

Or is there some other way that this normally goes?

Thanks all!

When this happened to us, I just withdrew the overage in your case the 7000 and just filed my taxes with 0$ contributions for 2021 and called it a day

 

[Mrs. Rannous]

Any tax savants out there I could lean on?

In January 2021 I contributed $7k to my Roth.  Ditto my wife.  I was just running our 2021 taxes (married-filing-jointly) a few days ago, and Turbo Tax informed me we were not eligible to make Roth contributions in 2021.  I goofed, basically.  I plan to withdraw the contributions (I don't like the lifetime tracking burden imposed if I recharacterize, since I'd be mingling deductible and non-deductible IRAs).

The withdrawal process:  I know the size of the contributions ($7k each) and the gains those contributions saw (~ $1k each), from the January 2021 contribution time to now.  I have the paperwork to instruct my institution to perform the "distribution" for each of us.  The key is that this distribution will be in 2022.

My questions really begin here.  I have read that I will eventually get a 1099-R from my institution, but that I probably won't get this until it is too late to include in my 2021 taxes, which I plan to file by April.  How does this sequence of events usually go?

Do I make up my own 1099-R, and include it in my 2021 taxes?

Do I make no mention at all of this until the 1099-R shows up, and then file "corrected" 2021 taxes (say next January)?

Do I just wait until I'm filing my 2022 taxes to report the 1099-R?

Or is there some other way that this normally goes?

Thanks all!

This might answer your question.

 

[Sleestak]

This might answer your question.

That is good general stuff.  It doesn't address the fact that I won't be getting a 1099-R until way down the road, and how do I handle that for the 2021 tax year taxes I am currently filling out.

Let me ask another way:  The excess contribution has been in my Roth from 5 JAN 2021 to now.  Is it a fair statement to say that if I were to withdraw my contribution today, the gains on the withdrawn contribution would be deemed as being earned in 2022?  And if that is the case, I can just chill about not getting a 1099-R until next January?

 

[Mrs. Rannous]

That is good general stuff.  It doesn't address the fact that I won't be getting a 1099-R until way down the road, and how do I handle that for the 2021 tax year taxes I am currently filling out.

Let me ask another way:  The excess contribution has been in my Roth from 5 JAN 2021 to now.  Is it a fair statement to say that if I were to withdraw my contribution today, the gains on the withdrawn contribution would be deemed as being earned in 2022?  And if that is the case, I can just chill about not getting a 1099-R until next January?

I have no idea who your Roth is with, but can't you just call and ask them?

 

[Sleestak]

I have no idea who your Roth is with, but can't you just call and ask them?

Morgan Stanley.  Yes, I've talked to my guy there and he doesn't know all the answers.  We will talk again this AM, specifically about the mechanics of getting the withdrawal ($7k+gains) correct to the penny.  Gains are a moving target day to day obviously.  I also plan to ask him specifically about whether the earnings that are part of the withdrawal (which will happen next week) need to be reported in the 2021 taxes or the 2022 taxes.

He did clue me into the future bookkeeping annoyance that arises from the mixing of deductible and non-deductible IRAs, which steered me away from recharacterization of the Roth as a T-IRA and back towards just performing a Withdrawal of the tax year 2021 contribution.  So he isn't totally useless.  But he's an investment guy, not a tax guy.

We'll, get there, and I appreciate you trying to help me.  Determining if the gains are reportable in the 2021 or 2022 taxes is the core of what I'm trying to find out.  I hope the answer is "2022" so I don't have to do anything right now other than execute the withdrawal.

 

[BobbyLayne]

That is good general stuff.  It doesn't address the fact that I won't be getting a 1099-R until way down the road, and how do I handle that for the 2021 tax year taxes I am currently filling out.

After you request the distribution, complete Form 8606 & file it with your tax return.

 

[Sleestak]

After you request the distribution, complete Form 8606 & file it with your tax return.

For Form 8606 I'd be only using Part III "Distribution from Roth IRAs".  Line 19 of that form reports reports distributions in 2021.  I've not yet performed the distribution as I've not yet withdrawn the excess 2021 Roth contribution.  I will soon (and before the mid-April deadline).  Does that mean I should file Form 8606 next spring with my 2022 taxes?

 

[belljr]

You need to file it for 2021. The earnings need to be file for the year they were earned on the excess

Your contributions will be $0

And you pay tax/penalty on the earnings.

I just did it again last year and I think that's what we did.

I'm not a tax expert 

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. 

https://www.taxact.com/support/1280/2016/ira-or-roth-ira-excess-contributions#:~:text=Tax on Excess Contributions&text=You must pay the 6,end of your tax year.

 

[Sleestak]

Ah, I think this governs it.  From the Form 8606 Instructions, bottom of page 4:

Return of IRA Contributions

If, in 2021, you made traditional IRA contributions or Roth IRA contributions (I did) for 2021 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2021 tax return (I will have), the returned contributions are treated as if they were never contributed. Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2021 and any related earnings on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. Also include the related earnings on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4b. Attach a statement explaining the distribution. Also, if you were under age 59 1/2 at the time of a distribution (I am) with related earnings, you are generally subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and its instructions).

Based on the above, on my 2021 taxes I:

- DONT report the contribution or distribution on Form 8606

- DONT take a deduction for the contribution (duh)

- DO report Contribution+Earnings on Form 1040 line 4a ("IRA Distributions")

- DO report Earnings on Form 1040 line 4b ("Taxable amount")

- DO attach a statement explaining the distribution

- DO attach Form 5329, with Part I "Additional Tax on Early Distributions" filled out

Really appreciate the help from everyone!  I think withdrawal is a better route than recharacterization since it just ends it - no eternal bookkeeping involving mixed IRAs going forward.  And I think I understand what I need to do based on the above.  Still not sure how the 1099-R plays into this.  Guess I'll find out going forward!

 

[Mrs. Rannous]

We use TaxAct also.  Gotta love it.  It walked us through some weird tax issues with no problems.  They even have an online page to include the "attached statement" you will need.

 

[brun]

Resurrecting this thread. I have a question that is related.
It looks like I will have an excess roth contribution for 2024 because I miscalculated what my MAGI would be.
It looks like one option, not covered in this thread, would be to push the excess into the following year. Has anyone done this or have knowledge about any gotchas?
I just sent a query to Itrust Capital, where this particular Roth resides, this morning so nothing from them yet.