Excess Roth Contribution

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Topic Author
drzzzzz
Posts: 646
Joined: Sat Sep 22, 2012 9:56 pm

Excess Roth Contribution

Post by drzzzzz »

Hi
Made a Roth contribution in early 2020, but my income for 2020 was higher than the threshold and now it is an excess Roth contribution. I have a traditional IRA with a large balance and so just want to withdraw the 2020 contribution in cash and send it to my banking account which is easy to do online with Vanguard. I know the contribution will not be taxable, but any earnings that Vanguard determines was made on the contribution for the year are taxable. Since I have done this withdrawal before filing my taxes for 2020 and am over age 60 there are no penalties. What I want to understand is whether I need to report the earnings this year on my 2020 tax retun and if so on which line is it entered or is it done next year when Vanguard sends me a 1099-R with the taxable distribution amount noted. Thanks
Alan S.
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Location: Prescott, AZ

Re: Excess Roth Contribution

Post by Alan S. »

drzzzzz wrote: Wed Mar 03, 2021 6:16 pm Hi
Made a Roth contribution in early 2020, but my income for 2020 was higher than the threshold and now it is an excess Roth contribution. I have a traditional IRA with a large balance and so just want to withdraw the 2020 contribution in cash and send it to my banking account which is easy to do online with Vanguard. I know the contribution will not be taxable, but any earnings that Vanguard determines was made on the contribution for the year are taxable. Since I have done this withdrawal before filing my taxes for 2020 and am over age 60 there are no penalties. What I want to understand is whether I need to report the earnings this year on my 2020 tax retun and if so on which line is it entered or is it done next year when Vanguard sends me a 1099-R with the taxable distribution amount noted. Thanks
If you request the excess Roth contribution to be returned, any gains will be taxable on your 2020 return, which is the year in which you made the excess contribution. You will know the gains since they are the excess you receive over the contribution amount returned. You would report these gains on line 4b of Form 1040 and add an explanatory statement. Then when you get the 1099R next January, it will be coded to apply to 2020, and you can just attach it to your tax records. It will not be reported on your 2021 return.

That said, if the gain on your excess exceeds roughly 25% (VG may be able to give you a figure), you might save tax dollars by leaving the excess in for now and paying the 6% excise tax. That will avoid an earnings distribution and preserve the gains in your Roth. But you still have an excess that will have to be addressed before year end to avoid a second excise tax. The filing and transaction work for these two options are different, but about equal. Or you might just want to complete this now regardless of what the savings might be. Your choice.
Topic Author
drzzzzz
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Joined: Sat Sep 22, 2012 9:56 pm

Re: Excess Roth Contribution

Post by drzzzzz »

Alan S. wrote: Wed Mar 03, 2021 8:02 pm
drzzzzz wrote: Wed Mar 03, 2021 6:16 pm Hi
Made a Roth contribution in early 2020, but my income for 2020 was higher than the threshold and now it is an excess Roth contribution. I have a traditional IRA with a large balance and so just want to withdraw the 2020 contribution in cash and send it to my banking account which is easy to do online with Vanguard. I know the contribution will not be taxable, but any earnings that Vanguard determines was made on the contribution for the year are taxable. Since I have done this withdrawal before filing my taxes for 2020 and am over age 60 there are no penalties. What I want to understand is whether I need to report the earnings this year on my 2020 tax retun and if so on which line is it entered or is it done next year when Vanguard sends me a 1099-R with the taxable distribution amount noted. Thanks
If you request the excess Roth contribution to be returned, any gains will be taxable on your 2020 return, which is the year in which you made the excess contribution. You will know the gains since they are the excess you receive over the contribution amount returned. You would report these gains on line 4b of Form 1040 and add an explanatory statement. Then when you get the 1099R next January, it will be coded to apply to 2020, and you can just attach it to your tax records. It will not be reported on your 2021 return.

That said, if the gain on your excess exceeds roughly 25% (VG may be able to give you a figure), you might save tax dollars by leaving the excess in for now and paying the 6% excise tax. That will avoid an earnings distribution and preserve the gains in your Roth. But you still have an excess that will have to be addressed before year end to avoid a second excise tax. The filing and transaction work for these two options are different, but about equal. Or you might just want to complete this now regardless of what the savings might be. Your choice.
Thanks for the response which is really useful - what I am confused about is whether I treat this as a 1099R and on the electronic return put in Vanguard and their EIN and address or somehow try to enter the information differently. Using Taxslayer and it seems to get items to 4a or 4b you need to fill in the 1099R screen.

One other question is whether next year's 1099 from Vanguard for 2020 will include both the excess contributions to the Roth and earnings or just earnings? I guess my question is whether distributions from Roth accounts get 1099R forms. Again thanks
Alan S.
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Re: Excess Roth Contribution

Post by Alan S. »

Yes, some tax programs will require you to supply a dummy 1099R in a situation like this.

While the 1099R you will get next year will have Code P in Box 7, the dummy one you produce will have to use Code 8 in Box 7 since the dummy will be a 2020 1099R and the gains are taxable in 2020 (code 8). The total distribution goes in Box 1, the taxable earnings in Box 2a. Do not check the "taxable amount not determined box (2b) or the IRA box in Box 7.

Make sure the gain (2a) show on Form 1040, line 4b, and the total distribution you receive on line 4a. Try to provide an explanatory statement indicating the date and amount of the excess contribution and the year it is for, and the date and amount of the distribution and amount of the earnings.

Then when you get the actual 1099R in Jan, 2022, it should look the same except it will be coded P indicating that earnings were taxable in 2020. Since that is what you will have reported, you do not have to file anything on your 2021 return. Just keep the actual 1099R with your other tax papers for your 2020 return.

You should not report this distribution on Form 8606.
sungchiahao
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Re: Excess Roth Contribution

Post by sungchiahao »

I followed the guide to fill out dummy turbotax for removing Roth IRA excess. However, the program put the earnings into line1 as pension???? I am not sure what was my error.
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neurosphere
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Re: Excess Roth Contribution

Post by neurosphere »

sungchiahao wrote: Mon Apr 26, 2021 12:53 pm I followed the guide to fill out dummy turbotax for removing Roth IRA excess. However, the program put the earnings into line1 as pension???? I am not sure what was my error.
Can you elaborate? Line 1 is "wages, salaries, tips, etc". What otherwise indicates to you it was treated as pension income?

Make sure that the code 8 is used for the dummy 1099.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
Alan S.
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Re: Excess Roth Contribution

Post by Alan S. »

Try entering Code J next to the 8 in Box 7. I should have told you that before.

That should remove this from the wages line, and the corrective distribution should go on line 4.
cas
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Re: Excess Roth Contribution

Post by cas »

Alan S. wrote: Mon Apr 26, 2021 1:17 pm Try entering Code J next to the 8 in Box 7. I should have told you that before.
In this situation is there any difference in the Box 7 Code depending on whether the person is greater or less than 59 1/2 years old?

(I've been referring people to this post who are trying to fill out a dummy 1099-R for this situation, but I haven't been sure how the +/- 59 1/2 condition affects the Box 7 Code.)
Alan S.
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Re: Excess Roth Contribution

Post by Alan S. »

cas wrote: Mon Apr 26, 2021 1:57 pm
Alan S. wrote: Mon Apr 26, 2021 1:17 pm Try entering Code J next to the 8 in Box 7. I should have told you that before.
In this situation is there any difference in the Box 7 Code depending on whether the person is greater or less than 59 1/2 years old?

(I've been referring people to this post who are trying to fill out a dummy 1099-R for this situation, but I haven't been sure how the +/- 59 1/2 condition affects the Box 7 Code.)
Yes, knowing OP was over 59.5, I forgot that the J code applies here despite age, contrary to the usual situation.

The 1099R coding regime is stretched very thin. Box 7 does not contain a Roth box, just IRA/SEP/SIMPLE. But if this box is not checked the 8 or P code will be viewed to apply to a qualified plan corrective distribution, and those earnings go to the wages line. Therefore, to prevent a Roth corrective distribution from going to the wages line, I guess the IRS had to come up with some code that identified the distributing plan as a Roth IRA, and J (early Dist) was the only one that would work.
cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Excess Roth Contribution

Post by cas »

Alan S. wrote: Mon Apr 26, 2021 2:44 pm Yes, knowing OP was over 59.5, I forgot that the J code applies here despite age, contrary to the usual situation.
Thanks for all the expertise you share here, Alan!
SC Anteater
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Re: Excess Roth Contribution

Post by SC Anteater »

Alan S. wrote: Mon Apr 26, 2021 2:44 pm
cas wrote: Mon Apr 26, 2021 1:57 pm
Alan S. wrote: Mon Apr 26, 2021 1:17 pm Try entering Code J next to the 8 in Box 7. I should have told you that before.
In this situation is there any difference in the Box 7 Code depending on whether the person is greater or less than 59 1/2 years old?

(I've been referring people to this post who are trying to fill out a dummy 1099-R for this situation, but I haven't been sure how the +/- 59 1/2 condition affects the Box 7 Code.)
Yes, knowing OP was over 59.5, I forgot that the J code applies here despite age, contrary to the usual situation.

The 1099R coding regime is stretched very thin. Box 7 does not contain a Roth box, just IRA/SEP/SIMPLE. But if this box is not checked the 8 or P code will be viewed to apply to a qualified plan corrective distribution, and those earnings go to the wages line. Therefore, to prevent a Roth corrective distribution from going to the wages line, I guess the IRS had to come up with some code that identified the distributing plan as a Roth IRA, and J (early Dist) was the only one that would work.
Hi Alan,

I'm trying to work through this too, using FreeTaxUSA. I can't put a J next to the 8 in Box 7 (it's one or the other) and the amount is not showing up on line 4b on my return. Any suggestions?
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