Excess Roth contribution reportable when
Client removed her 2020 Roth IRA contribution of $7,000 plus the earnings of $2,000 in March 2021 once her tax software made her aware her 2020 MAGI would be to high. She also removed her 2021 Roth IRA contribution plus $500 of earnings at same time assuming her MAGI would also be to high which she was correct.
She received both 1099R’s in Jan 2022 for 2021 activity. She didn’t report any of the $2,000 of gains from 2020 on her 2020 return thinking it was to be placed on 2021 return.
I get this question a lot, should she have claimed the $2,000 of earnings on her 2020 return at the time she was filing thou she didn’t have an official 1099R to report it? Or is it to be reported in 2021? The 2021 earnings is simple since she removed in 2021 but she doesn’t know if she adds the 2020 earnings of $2,000 to 2021 return or needs to amend her 2020 return to reflect the $2,000 of profit.
I don’t know if the tax software (Turbo Tax) is smart enough to allow any earnings to be added once it tells a client they have to remove their access. I assume not but don’t self prepare my taxes.
This is always a confusing topic when an excess IRA contribution is removed before filing deadline but yet in year after contribution was made and no official tax form is in hand. Shocking how many tax preparers have no idea how to handle!!
Any perspective would be appreciated??
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-06 02:04
Returned earnings and any penalty due must be reported in the year IN WHICH the returned contribution was actually made. Custodians know this and therefore should be coding their 1099R Box 7 with the code that reflects the year the earnings income is to be reported. If the 2020 excess contribution was made in 2020 and returned in 2021, the code should be P(and J) if under 59.5. That would require an amended return for 2020, but the PJ coded 1099R just received could be ignored for purposes of the 2021 return. The other 1099R should be coded 8 or 8J and will be reported on the 2021 return.