Roth IRA Withdrawal and Re-Contribution?
In 2021 I switched my Roth IRA over from Fidelity to M1.
I had fully contributed in 2020 and 2021 and in January 2022 I withdrew $5K from the Roth IRA. M1 doesn’t ask what year you’re withdrawing from or whether you’re withdrawing your original contribution or gains.
It just asks the withdrawal reason and I selected Premature since I’m only 25. I had minimal gains in the account so I have reason to believe what I withdrew was just my original contribution, which I believe there are no taxes/penalties for doing so.
Either way, I want to re-contribute the $5K now prior to the 4/18 tax deadline for 2021 but am wondering if there are any issues with doing so? Also, I’ve already filed my taxes but the 1099 I received from M1 mentions nothing about the Roth IRA withdrawal. So I’m also wondering if I am able to re-contribute the money, if I would have to also amend my tax return.
Would appreciate any help on this!
Permalink Submitted by Alan - IRA critic on Fri, 2022-04-01 23:55
You indicated that you already made your 2021 contribution and did not request a return of your 2021 contribution, so your 2021 contribution remains on record. Therefore, you cannot make another 2021 contribution. In addition, you could have done a 60 day rollover of your January, 2022 distribution, however unless you received that distribution after 2/2/2022 your 60 day rollover deadline will have expired by 4/4.
You took the distribution this year, so you will not get a 1099R reporting that until Jan, 2023. You will get a 5498 in May showing your 2021 Roth contribution. However, your main issue is that you did not request your distribution correctly, as a return of your specific 2021 regular contribution.
Permalink Submitted by Chris Enns on Mon, 2022-04-04 15:13
Alan,Thank you for the response! I was diving deep into the IRS website to try to figure out this info so your response was a big help.I reached out to M1 and asked if they were able to retroactively change the distribution type from January and they asked what I would like to change it to. I’m assuming I should tell them to change it to “Excess Contribution Removal before Tax Deadline”?
Permalink Submitted by Alan - IRA critic on Mon, 2022-04-04 15:45
They should not be doing a retroactive change unless they feel they mishandled your original request. If they did what you asked, the IRS has not authorized redoing the transaction. That said, since the transaction was done this year, there has been no tax reporting (1099R) forms issued that they would have to reverse.
Yes, if they will actually re process and re code the January distribution as a return of your 2021 contribution, they will have to perform the earnings calculation retroactively to the first distribution date, and correctly reflect the transaction for 1099R purposes next January. If they clarify that this will be done, you can make a new 2021 contribution by 4/18, and you can make that contribution by 4/18 even if they agree to redo the January distribution, but have not completed it by 4/18. The one deadline you cannot miss is 4/18 for the new contribution. Again, it is not clear whether the rep fully understood the implications of your question or intended to research the answer further. But a redo is what you would like if possible.
Permalink Submitted by Chris Enns on Mon, 2022-04-18 16:12
M1 finally got back to me and I decided not to re-contribute prior to the tax deadline. They did say they could still change the distribution reason for me from January from “Premature” to “Excess Contribution Removal”. Since I basically was even in terms of gain/loss I’d say what I withdrew was just contributions. That said, does the distribution reason even matter at that point?
Permalink Submitted by Alan - IRA critic on Mon, 2022-04-18 17:07
If you are not going to recontribute for 2021 (deadline today), there is no need to request them to recode the distribution you took. Recoding (and adjusting it for earnings) would have changed the premature distribution you took to a return of your 2021 contribution, freeing up room to re contribute it. That is the only way to get your 6000 back into the Roth IRA as a 2021 contribution.
Leaving as is means your Roth lost 6000 of value. You can still make a 2022 contribution if your income is not too high, but you have lost the 2021 contribution space. The 1099R you will get next January will be coded J, and you will have to report it on Form 8606 with your 2022 return. Since this distribution came from your balance of regular Roth contributions, it will be tax and penalty free.
Since you are not making a new 2021 contribution today, better get back to M1 and tell them to leave the January withdrawal coded as is. Otherwise, if they recode it they will have to do an earnings calculation for the time period between your 2021 contribution and the January withdrawal, and return any earnings to you. Those earnings will be taxable on your 2021 return and subject to penalty, and since you already filed 2021, it would trigger an amended return.
You mentioned a 1099R you received earlier, but that would not be for the January distribution. It must have been for some other distribution that you took in 2021. What was that 1099R for?
Permalink Submitted by Chris Enns on Mon, 2022-04-18 18:56
Okay, perfect. This has been a huge help and great advice. I’ll let them to know to keep it as is. The 1099 Composite I received in Feb. appears to be for Misc income for signing up an account and shows sale proceeds for my non-Roth individual investment account. So, that was irrelevant of me to mention that earlier.