TurboTax error in handling excess Roth contribution?

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markfaix
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TurboTax error in handling excess Roth contribution?

Post by markfaix » Fri Apr 12, 2019 7:46 pm

I am posting on behalf on my minor son.

In 1/2018, my son contributed $4100 to a Roth IRA for tax year 2017. He then found out his W-2 income would be $4000, so he withdrew the $100 excess contribution from his Roth in 3/2018.

In 1/2019, my son contributed $3000 to his Roth for tax year 2018. His 2018 W-2 income was ~$3500, so no excess contribution occurred.

TurboTax is asking him to "indicate how much of your remaining excess contribution of $100 [from 2017] you want to credit toward your 2018 Roth IRA contributions." I believe this should be $0, because he withdrew the $100 excess.

However, TT is flagging this as an error. It says that he should credit the $100 excess to the Roth IRA contribution. Then TT says that his total 2018 Roth contributions are $3100 ($3000 original contribution + $100 credit from the excess contribution). But the $100 excess contribution was already withdrawn!

TT will not let him e-file with this error. What am I doing wrong or misunderstanding?


Edited to provide date of Roth contributions
Last edited by markfaix on Mon Apr 15, 2019 10:20 am, edited 1 time in total.

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RickBoglehead
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Re: TurboTax error in handling excess Roth contribution?

Post by RickBoglehead » Fri Apr 12, 2019 8:27 pm

Did he enter the form sent that indicated the $100 return of contribution? TT is looking for that.
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markfaix
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Re: TurboTax error in handling excess Roth contribution?

Post by markfaix » Fri Apr 12, 2019 8:31 pm

RickBoglehead wrote:
Fri Apr 12, 2019 8:27 pm
Did he enter the form sent that indicated the $100 return of contribution? TT is looking for that.
Yes, he entered the 1099-R documenting returning of the $100 excess contribution.

Alan S.
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Re: TurboTax error in handling excess Roth contribution?

Post by Alan S. » Fri Apr 12, 2019 8:35 pm

What was the year on that 1099R, the amounts in Box 1 and 2a, and code in Box 7?

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markfaix
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Re: TurboTax error in handling excess Roth contribution?

Post by markfaix » Fri Apr 12, 2019 8:45 pm

Alan S. wrote:
Fri Apr 12, 2019 8:35 pm
What was the year on that 1099R, the amounts in Box 1 and 2a, and code in Box 7?
1099-R 2018
Box 1 Gross distribution $100.02
Box 2a Taxable amt $0.02
Box 7 Dist codes 8J (8=return of contribution taxable in 2018; J=early dsitribution from Roth IRA)

The initial contribution was made in 01/2018 for tax year 2017. The excess was withdrawn in 03/2018.

Alan S.
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Re: TurboTax error in handling excess Roth contribution?

Post by Alan S. » Sun Apr 14, 2019 11:05 pm

Thanks, but there is a conflict between your first post and your most recent regarding WHEN contributions were made for each year.

The 1099R coding indicates the return of a contribution made in 2018 but cannot specify whether it was FOR year 2017 or 2018. However, you indicated in your first post that the 2017 contribution was made in 2017 and the 2018 contribution was made in 2018. Therefore, the return of contribution as coded by the custodian was from a contribution made IN 2018. Only Form 5498 shows how the custodian coded which year a contribution is for. What does the 5498 show for the amount of 2017 contributions? This form was issued in May, 2018.

If TTax thinks that the 100 removed was from a contribution for 2018, the 2017 excess will remain in place and an excise tax of $6 is owed for 2017 on Form 5329. The removal then reduced the 2018 contribution to 2900, and the question is whether to apply the 2017 excess to 2018? Before replying, determine how much earned income he had in 2018, since you do not want to transfer a 2017 excess to 2018 and create a 2018 excess.

This is very confusing. Please clarify the amounts and dates made of both the 2017 and 2018 contributions. If you are running out of time you might simply tell Ttax to apply the 100 to 2018, and see what the program does.

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markfaix
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Re: TurboTax error in handling excess Roth contribution?

Post by markfaix » Mon Apr 15, 2019 11:04 am

Alan S. wrote:
Sun Apr 14, 2019 11:05 pm
Thanks, but there is a conflict between your first post and your most recent regarding WHEN contributions were made for each year.

The 1099R coding indicates the return of a contribution made in 2018 but cannot specify whether it was FOR year 2017 or 2018. However, you indicated in your first post that the 2017 contribution was made in 2017 and the 2018 contribution was made in 2018. Therefore, the return of contribution as coded by the custodian was from a contribution made IN 2018. Only Form 5498 shows how the custodian coded which year a contribution is for. What does the 5498 show for the amount of 2017 contributions? This form was issued in May, 2018.

If TTax thinks that the 100 removed was from a contribution for 2018, the 2017 excess will remain in place and an excise tax of $6 is owed for 2017 on Form 5329. The removal then reduced the 2018 contribution to 2900, and the question is whether to apply the 2017 excess to 2018? Before replying, determine how much earned income he had in 2018, since you do not want to transfer a 2017 excess to 2018 and create a 2018 excess.

This is very confusing. Please clarify the amounts and dates made of both the 2017 and 2018 contributions. If you are running out of time you might simply tell Ttax to apply the 100 to 2018, and see what the program does.
Alan S.,

Thank you for your reply. You are correct that I erred in the dates of contributions in my original post, which I have edited to reflect the correct dates. I have filed an extension.

Here are the relevant dates, contributions and forms:

1/2018: made $4100 Roth contribution for tax year 2017.
3/2018: Withdrew excess $100 contribution for tax year 2017, as W-2 income for 2017 was $4000.

Box 10 of form 5498, issued in 5/2018 for tax year 2017, shows $4100 in Roth IRA contributions.
It doesn't reflect the $100 excess contribution withdrawn.

1/2019: made $3000 Roth contribution for tax year 2018. W-2 income for 2018 was $3500, so no issues with excess contributions.

2018 Form 1099R indicates Box 1 gross distribution $100.02; Box 2a taxable amt $0.02; Box 7 dist code 8J (8=return of contribution taxable in 2018; J=early dsitribution from Roth IRA)


So apparently TTax thinks that the $100 excess contribution withdrawn in 2018 was for tax year 2018, but actually it was for tax year 2017. Any suggestions based on the above? Thank you.

Alan S.
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Re: TurboTax error in handling excess Roth contribution?

Post by Alan S. » Mon Apr 15, 2019 11:49 am

Ok, now it all makes sense.
Except we are back to your original problem trying to figure out why Ttax apparently does not think that the contribution returned was for 2017.

The 1099R codes are correct, because the 8 code correctly means that if there were any earnings (there isn't since .02 rounds to 0) those earnings would be taxable in 2018. But that does NOT mean that the return couldn't have been a 2017 contribution.

I don't have the program here, so perhaps someone that does can chime in. Be sure you have not changed the year of the 1099R from 2018, and check for a question asking FOR which year's contribution was returned, and answer 2017.

The Form 5498 is not corrected to reflect returned contributions. The IRS depends on 1099R forms such as this to report returned contributions, but the 1099R does not clarify WHICH year's contribution was returned since it will look the same whether a 2017 contribution or a 2018 contribution was returned. Ttax apparently is treating the 1099R as if a 2018 contribution is being returned, which is not correct.

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markfaix
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Re: TurboTax error in handling excess Roth contribution?

Post by markfaix » Mon Apr 15, 2019 8:29 pm

Alan S. wrote:
Mon Apr 15, 2019 11:49 am
Ok, now it all makes sense.
Except we are back to your original problem trying to figure out why Ttax apparently does not think that the contribution returned was for 2017.

The 1099R codes are correct, because the 8 code correctly means that if there were any earnings (there isn't since .02 rounds to 0) those earnings would be taxable in 2018. But that does NOT mean that the return couldn't have been a 2017 contribution.

I don't have the program here, so perhaps someone that does can chime in. Be sure you have not changed the year of the 1099R from 2018, and check for a question asking FOR which year's contribution was returned, and answer 2017.

The Form 5498 is not corrected to reflect returned contributions. The IRS depends on 1099R forms such as this to report returned contributions, but the 1099R does not clarify WHICH year's contribution was returned since it will look the same whether a 2017 contribution or a 2018 contribution was returned. Ttax apparently is treating the 1099R as if a 2018 contribution is being returned, which is not correct.
I figured out the problem! As mentioned above, I withdrew the excess $100 contribution for tax year 2017 in 03/2018. However, when I filed my 2017 1040, I incorrectly paid the 6% excise tax for excess contributions, so to TTax it appeared that I never withdrew the $100 excess contribution. That is why TTax kept forcing me to add the $100 to my 2018 Roth IRA contributions.

It appears I have two choices:
1) I could file an amended return form 5329 for 2017. Obviously I am not going to file an amendment just to get the $6 excise tax back for 2017. But I don't know if having a 2017 form 5329 what it shouldn't be there will cause future problems.

2) I could leave it alone. I would have forms 5329 for 2017 & 2018 that shouldn't be there because the original excess contribution for 2017 was already withdrawn in 03/2018. The 2018 Roth max allowed contribution is ~$200 greater than what I actually contributed, so no additional tax would be due.

Does it seem reasonable to just leave it alone?

Alan S.
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Re: TurboTax error in handling excess Roth contribution?

Post by Alan S. » Mon Apr 15, 2019 10:49 pm

The IRS computer matching will be looking for that 1099R distribution of 100 to show up on line 4a of Form 1040 for 2018, but since there is no tax due because of no earnings, they might not send an inquiry. If you allow Ttax to assign the excess to 2018, will you still be able to enter the 1099R?

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markfaix
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Re: TurboTax error in handling excess Roth contribution?

Post by markfaix » Tue Apr 16, 2019 11:42 am

Alan S. wrote:
Mon Apr 15, 2019 10:49 pm
The IRS computer matching will be looking for that 1099R distribution of 100 to show up on line 4a of Form 1040 for 2018, but since there is no tax due because of no earnings, they might not send an inquiry. If you allow Ttax to assign the excess to 2018, will you still be able to enter the 1099R?
Alan S.:

Yes, I can allow TTax to assign the excess to 2018 and also enter the 1099R showing the 100 distribution. I would need to state that my 2018 Roth contribution is 2900 + 100 excess = 3000 rather than 3000 straight up, but this does not affect total tax due.

If I leave it alone, the only residual errors would be:
1) $6 excise tax that I shouldn't have paid for 2017. No big deal.
2) Form 5329 for 2018 will be completed to document that I contributed >=$100 under the maximum allowed Roth contribution for 2018, because I incorrectly assigned the $100 excess to 2018. If I hadn't made this mistake, there would be no form 5329 for 2018 because there would be no excess contribution. Regardless, since no additional tax is due, I hope this would not trigger an inquiry. Does this seem reasonable?

Alan S.
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Re: TurboTax error in handling excess Roth contribution?

Post by Alan S. » Tue Apr 16, 2019 12:50 pm

markfaix wrote:
Tue Apr 16, 2019 11:42 am
Alan S. wrote:
Mon Apr 15, 2019 10:49 pm
The IRS computer matching will be looking for that 1099R distribution of 100 to show up on line 4a of Form 1040 for 2018, but since there is no tax due because of no earnings, they might not send an inquiry. If you allow Ttax to assign the excess to 2018, will you still be able to enter the 1099R?
Alan S.:

Yes, I can allow TTax to assign the excess to 2018 and also enter the 1099R showing the 100 distribution. I would need to state that my 2018 Roth contribution is 2900 + 100 excess = 3000 rather than 3000 straight up, but this does not affect total tax due.

If I leave it alone, the only residual errors would be:
1) $6 excise tax that I shouldn't have paid for 2017. No big deal.
2) Form 5329 for 2018 will be completed to document that I contributed >=$100 under the maximum allowed Roth contribution for 2018, because I incorrectly assigned the $100 excess to 2018. If I hadn't made this mistake, there would be no form 5329 for 2018 because there would be no excess contribution. Regardless, since no additional tax is due, I hope this would not trigger an inquiry. Does this seem reasonable?
Yes, and the IRS should be happy that you overpaid by $6, and they shouldn't care that $100 was pulled out of the Roth. Any amount of a contribution can be returned by the due date whether it is excess or not, so the IRS will likely conclude that you assigned 100 to 2018, but then decided you needed 100 back. His Roth basis and account value will be $100 less as it stands. You could have contributed a little more for 2018, but the deadline to do that was yesterday.

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