Not eligible for roth contribution after marriage

[momo20]

Hi,

My wife and I got married in 2023. She was contributing to Roth for 2023. Our joint income is higher than the limit for Roth contribution, and thus we are not eligible for Roth anymore. So, my wife withdrew her 2023 contributions. She has not received a form 1099-R. I'm filling our 2023 tax jointly, and I'm confused on how I could report this situation to avoid any penalties. I searched the web and couldn't find anything. Can someone help please?

Thank you in advance!

[DanaB27]

You will get a 2024 Form 1099-R in 2025 with codes P and J for the withdrawal of the excess Roth IRA contribution made in 2023 plus earnings. This 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2024 Form 1099-R into the 2024 tax return since the withholdings are reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholdings will be applied to 2024.

To create a Form 1099-R in your 2023 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2024 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2022" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.

[momo20]

Hi @DanaB27 , thank you so much for your help. I have a couple of follow-up questions.
1- "Who gave you a 1099-R?", should this be the "Financial institution" if I had this with Fidelity?
2- "Is the IRA/SEP/SIMPLE box on this 1099-R checked?", is the answer here "No, the box is blank"?
3- I have "Do any of these situations apply to you?", should I say "None of these apply"?
4- I don't have the question "Did you use your IRA to pay for any of these expenses?", what should I do?

[DanaB27]

1. Yes, you select Financial institution
2. Yes, the IRA/SEP/SIMPLE box is blank and you will answer "No, the box is blank"?
3. Yes, you will select "None of these apply"
4. If you did not have any earnings ($0 in box 2a) then you will not get the screen "Did you use your IRA to pay for any of these expenses?". If you had earnings, please make sure you click continue after entering all Form 1099-Rs to get to the screen.

[momo20]

Thank you @DanaB27 , appreciate your help.

[AprilWang]

Dana, I can't help but following up since I have an almost identical situation, except my contribution was made on 12/31/22.  Would it be OK if I do the same thing for 2023 tax return, report withheld tax of $1.15 in 2024 return, but then add amending my 2022 return?  Thank you so much!

[AprilWang]

sorry the above follow up question was for @DanaB27 

[DanaB27]

To confirm, you made an excess Roth IRA contribution for 2022 on 12/31/2022 and didn't remove it by the extended due date of the 2022 return?  Then you should have requested a regular distribution without the earnings since it wasn't removed by the due date. If you removed the funds in 2024 then you will receive a 2024 Form 1099-R and will enter it on your 2024 return. 

You will have to pay the 6% penalty for 2022 and 2023 (assuming you cannot apply the excess as a 2023 Roth contribution.)

On your 2022 return you will enter the Roth IRA contribution and TurboTax will automatically calculate the excess contribution. On the 2023 return you will follow these steps:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022.

@AprilWang 

[AprilWang]

@DanaB27

Thank you so much for your response.  To confirm, yes I made the ineligible Roth contribution of $7500 on 12/31/22, but didn't remove it until 4/5/24, missing the extended due date of 2022 return, but hoping to catch 2023 return.  To confirm, I would go back to Turbo Tax 2022 and amend 2022 return with 6% penalty on the $7500; for 2023 return, I would file now with 6% penalty, not having to wait for 1099-R; for 2024 return, enter 2024 1099-R for the $1.15 withheld tax.  Is that right?

One additional detail, with net losses in the account, I removed the total account balance left, which I would call withdraw excess contribution with earnings(losses).  You mentioned “should have requested a regular distribution without the earnings”, so to clarify, if done within due date, it’s called withdraw of excess contribution (and should be done with earnings included), but after due date it becomes a regular distribution? And for regular distribution, earnings should not be included?  So I wanted to be aware whether that’s significant, i.e. the regular distribution and the earnings?  With the way I had the whole balance removed and with withheld tax, could I still follow what you suggested above?  Thanks in advance so much for your help.

[DanaB27]

Yes, that is correct, you would go back to Turbo Tax 2022 and amend 2022 return with 6% penalty on the $7500; for 2023 return, you would file now with 6% penalty by entering the excess contribution for prior years in the IRA contribution section. You don't enter the 2024 Form 1099-R on your 2023 return, you will enter it on your 2024 return.

You requested the withdrawal in 2024, which was after the due date of the 2022 return, therefore, you need to only remove the excess contribution amount as a regular distribution (ignore earnings or losses). If you removed less because of the loss but emptied the account then then the excess contribution will be resolved in 2024 when you enter the 2024 Form 1099-R on your 2024 return. The 6% penalty for 2024 is calculated as the smaller of the excess contribution or the value of your Roth IRAs on December 31, 2024 (including 2024 contributions made in 2025). Therefore, if your Roth account is empty then the excess contribution will resolve in 2024.

@AprilWang 

[AprilWang]

@DanaB27 

Again much thanks.  Confirming, you said “The 6% penalty for 2024 is calculated as the smaller of the excess contribution or the value of your Roth IRAs on December 31, 2024 (including 2024 contributions made in 2025).” – with my excess 2022 contributions 0 (already gone by this time), and 2024 contribution through backdoor conversion $8000 (between 4/16/24 – 4/15/25), so the 6% penalty would be calculated based on the smaller 0.  If so, my eligible contributions would not impact this calculation for 2024.

Backing up one year, since I am trying to clean and restart my Roth at this moment.  I already contributed on 4/9/24 non-deductible traditional IRA, trying to convert backdoor to Roth by 4/15, so as to be treated as 2023 contribution/conversion.  With this 2023 conversion, how would 2023 penalty be calculated?  On top of “entering the excess contribution for prior years in the IRA contribution section”, do I also enter contribution for current year 2023 in the IRA contribution section?  If so, does that change the penalty?

I suspect I’ll have to leave the backdoor conversion for 2024 return, then my 2024 1099-R would contain a) withdraw for prior contribution b) 2023 contribution through backdoor conversion and c) 2024 contribution through backdoor conversion, but that should not lead to more penalty for 2024.  Is that right?  I can’t thank you enough.

[DanaB27]

If you took less out of the Roth IRA because of the loss but put funds in the Roth IRA via conversion and therefore, the value is not $0 on December 31, 2024, then the 6% penalty will be calculated on Form 5329 for 2024.

For example, if you made an 2022 excess contribution of $7,500 but only removed $7,000 in 2024 because that was all that was left in the Roth IRA account, then you still have a $500 excess contribution left. If your balance is $0 on December 31, 2024, then the penalty will be $0 because the 6% penalty for 2024 is calculated as the smaller of the excess contribution or the value of your Roth IRAs on December 31, 2024 (including 2024 contributions made in 2025). And the excess contribution will resolve because of the Form 5329 line 18 instructions. But if you add funds with the conversion and you balance at the end of 2024 is now $7,000 then the penalty will be $30 ($500 x 6%). And if you don't remove the excess contribution in 2025 then you will have to pay the 6% penalty again in 2025.

I would recommend to wait to convert you funds in the traditional IRA to Roth IRA until 2025. You can track the nondeductible traditional IRA contribution on 2023 Form 8606 line 14 and can enter this on your 2025 return when you make the conversion.

Your 2023 6% penalty will be calculated on Form 5329 part IV and will be the smaller of the excess Roth IRA contribution $7,500 or the the value of your Roth IRAs on December 31, 2023 (including 2023 contributions made in 2024).

@AprilWang 

[AprilWang]

@DanaB27 

Again thanks.  It makes sense to delay the conversion to Roth, great I can settle one thing.  Additionally, if I cancel/back out of the traditional IRA contribution by 4/15, I still have to report a distribution (in 2023 return), although no penalty for the contribution part, only earnings to be included in income, is that right?    

On my wife’s traditional IRA contribution on 4/5/24 and conversion to Roth on 4/8/24, do we have to report the contribution on 2023 Form 8606, if wanting this be counted as 2023 contribution?  On the conversion side, do we have to wait for the brokerage’s 1099-R and include that in 2024 return, or could we include that in 2023 return by creating the 2024 1099-R?  Much thanks.

[DanaB27]

Yes, if your wife made the traditional IRA contribution for 2023 then you will enter it in the IRA contribution section and make it nondeductible. TurboTax will fill out Form 8606 for you. The conversion will be reported on your 2024 return and the basis from your 2023 Form 8606 line 14 will be carried over to your 2024 return.  

Please see How do I enter a backdoor Roth IRA conversion?  for detailed instructions.

Yes , you can return the traditional IRA contribution by the due date. Only the earnings will be taxable and have to be reported on your 2023 return. The earnings will be subject to the 10% early withdrawal penalty since they are not the result of an excess contribution.

"The 10% additional tax on distributions made before you reach age 59½ doesn’t apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax." (Pub 590-A)

"Certain corrective distributions not subject to 10% early distribution tax. Beginning with distributions made on December 29, 2022, and after, the 10% additional tax on early distributions will not apply to a corrective IRA distribution, which consists of an excessive contribution (a contribution greater than the IRA contribution limit) and any earnings (the portion of the distribution subject to the 10% additional tax) allocable to the excessive contribution, as long as the corrective distribution is made on or before the due date (including extensions) of the income tax return." (Pub 590-B)

@AprilWang 

[AprilWang]

@DanaB27 This is really helpful, thank you so much!