Excess Roth Contribution
Taxpayer contributed $1,000 in January 2014 to their Roth IRA for tax year 2013. Turns out the contribution was an excess contribution and prior to 4-15-14 they reclassified the contribution as a 2014 Roth IRA contribution.
For tax year 2014 they received a 1099 form showing $1,050 gross distribution and $50 taxable amount. Box 7 was coded PJ.
Since the excess contribution was corrected prior to April 15 2014 I believe that the only taxable amount should be the $50 which represents the earnings. Also since taxpayer is under 59 1/2 the $50 would be subject to 10% penalty.
Question:
Are my above assumptions as to tax and penalty correct?
How is the above reported on the tax return.
I am having problems with getting my tax software to reflect the above as it shows the total amount being taxed.
Thanks as always
Howard
Permalink Submitted by Alan - IRA critic on Sat, 2015-03-21 03:51
Howard, according to the 1099R what they did was to process a corrective distribution of the excess contribution, but instead of sending the money to the taxpayer, they re contributed it as a 2014 contribution. However, the 1099R is coded P which is apparently incorrect as it treats the 50 as taxable for year 2013. But if the contribution was made in Jan, 2014 as you indicated the 50 should be coded as taxable in 2014 (Code 8J). Are you sure the contribution was not made in 2013? So only the 50 is taxable, but there is a conflict of which tax year it applies to. This makes all the difference as I am sure the taxpayer would prefer not to have to amend the 2013 return to include the 50 and the 10% penalty on the 50. Did you enter the P code into the program? If you just entered the J it would not treat this as an excess contribution correction and would make the total amount taxable.
Permalink Submitted by Howard Hook on Sat, 2015-03-21 18:11
Alan,You were correct. The contribution was made in 2013 but corrected in 2014. Rather than pull it out of the Roth they asked that it be reclassified as a 2014 Roth contribution. So is the following correct:An amended return needs to be filed for 2013 for the $50.The 1099 R information is not included anywhere on the 2014 return.If they left the whole $1,050 in the Roth and had it reclassified as a 2014 Roth contribution then the $1,050 would be considered their 2014 Roth contribution.Thanks as alwaysHoward
Permalink Submitted by Alan - IRA critic on Sat, 2015-03-21 19:39
Yes, you are correct. A 2013 1040X would add the 50 as taxable income and add the 10% penalty ($5) on the $50. There is a section on the 1040X to explain the reason for the amended return. The 2014 return is not affected at all by this.
Permalink Submitted by Howard Hook on Sat, 2015-03-21 22:13
Thanks as always AlanHoward