excess Roth IRA contribution noticed after filing my taxes; hoping @dmertz can answer

Question

I welcome all feedback to this question, especially @dmertz I made an excess contribution to my Roth IRA for 2021. I contributed $6000 in 2021, but after doing my taxes last week my AGI was only $1910 after credits/deductions (I am not a high wage earner). I don't even come close to the Roth IRA contribution phase out limits for MAGI ($129,000-140,000 or whatever it is this year). I file as single/head of household.  I am 25 yrs old.  So, I made an excess contribution to my Roth IRA in the amount of $4090 (from my understanding the max contribution to a Roth IRA is the lower of your AGI or $6000).I discovered this excess contribution after filing my taxes last week for 2021. I used TurboTax and it never alerted me to this excess contribution. Unbeknownst to me at the time I filed, the govt taxed me the 6% excise tax for the excess contribution (.06 x $4090=$245). So I have already paid that 6% excise tax to the govt in my 2021 taxes. I called Vanguard (where I have the Roth IRA) this week to have them remove/refund me the excess contribution of $4090 and any earnings on this excess contribution. It turned out that I had a net loss and not any earnings, so my excess contribution refund was the excess contribution ($4090) minus the associated losses (can't remember the exact numbers). Because I had a net loss, I won't have to pay any taxes on the "earnings". Vanguard said they will send me a 1099-R in January 2023. I Googled these questions but couldn't find the answers:  1. Do I have to file an amended 2021 return (1040-X) this year (asap/now) or is it fine to wait until next year when I have my 1099-R? >If I have to file an amended 2021 return right now, do I create a "substitute/dummy" 1099-R to include with my amended 2021 return/1040-X? >If no amended tax return needed right now (for 2021 tax return), does the 1099-R automatically trigger/mean that I have to file an amended 2021 return (in 2023 when I receive the 1099-R) or does the 1099-R info just have to be included somewhere in my 2022 tax return with no need for an amended 2021 return (next year)? I started to do a 2021 amended form, but there really isn't a place/form in Turbo Tax on the 1040X form to enter the excess contribution, etc...I figured it is fine to wait until I file my 2022 taxes since I have already paid the 6% excise tax for the excess contribution and since I had no earnings on the excess contribution, I don't owe any taxes on the earnings.However, the longer I wait I feel the less likely I will ever see that $245 refunded to me (if I indeed do get it refunded at some point; which brings me to question #2). I know it's only $245, but to me that is a lot of money.  2. Will I get refunded the $245 (6% excise penalty tax) I paid in my in 2021 tax return next year when I file my 2022 taxes and amended 2021 tax return (if required) since I corrected the excess contribution prior to the tax filing deadline of April 18, 2022?>If I have to amend the 2021 tax return right now, will the govt refund me the $245 as soon as they process the amended return this year ? 3. Since the Roth IRA withdrawal was due to an excess contribution, am I exempt from paying the 10% early withdrawal penalty (assessed for Roth IRA withdrawals when you are <59.5 yrs old)? I found one website that listed exceptions to the 10% early withdrawal penalty and one exception that was listed was when withdrawing excess contributions, but not sure the website was legit or up to date.  4. I assume it's ok to not report the loss associated with the excess contribution if I have to do an amended 2021 return (or if I am supposed to declare the loss in my 2022 taxes) because the loss (I am assuming) will decrease my 2021 AGI therefore putting me in this endless loop where my AGI decreases due to reporting the losses associated with excess contribution (assuming a continued bear market with losses) which will then reduce my allowed Roth IRA contribution.So I will then have to remove an additional amount from my Roth IRA created by the lower AGI (after subtracting the losses associated with the excess contributions), which reduces the Roth IRA contribution allowed. This becomes an endless loop with perpetual amendments (again assuming future 'excess contributions' will continue to have losses).To prevent this issue, this is why I assume I should just not report the loss associated with the excess contribution since it is not a gain and therefore I owe no taxes.  5. Lastly, I already contributed $1500 to my Roth for 2022 (from Christmas gifts, savings). I am currently unemployed and may likely not be employed at all this year (medical issues). So once I found out about my excess contributions in 2021, I asked Vanguard to also remove my $1500 contribution for 2022 because I fear my AGI will be $0 this year and I will end up in the same situation of an excess contribution for tax year 2022. I again ended up with a loss on this 2022 Roth IRA contribution (no earnings were gained on the contribution). Vanguard removed/refunded me the excess contribution of $1500 minus my net loss on the contribution. So I received a refund of $1452.15 when the net loss was calculated. Since I removed this $1500 in anticipation of having an AGI of $0 for 2022 and I had no earnings on the "excess" contribution for the gov't to tax (ie, an anticipated "excess" contribution if I don't get a job in 2022 and my AGI stays at $0), do I even need to report this "excess" withdrawal/transaction in my 2022 taxes (I think the only reason I would have to file 2022 taxes with an anticipated $0 income is to document the excess Roth contribution in 2021/1099-R info I receive in Jan 2023, but otherwise I wouldn't even file 2022 taxes with no income/job)?  >Will I receive another separate 1099-R in Jan 2023 for this early withdrawal? In other words, will I receive a 1099-R for the early withdrawal due to the excess Roth contribution in 2021 and another 1099-R for the early withdrawal in 2022 due to the anticipated excess Roth contribution in 2022? Thank you so much for any help/advice. @dmertz

dmertz · Answer

Since you are nowhere near the phase-out limits, your maximum Roth IRA contribution is limited by compensation, not by AGI. Assuming that you are not self-employed (which seems to be a reasonable assumption since you are not using the Self-Employed version of online TurboTax), your IRA contributions for 2021 cannot exceed the total shown in box 1 of any Forms W-2 you received. However, you indicated a penalty of $245 on your filed 2021 tax return, so apparently your AGI consists entirely of your W-2 wages and nothing else.

You'll need to amend your 2021 tax return, but you'll want to wait until your original filing has been processed. When doing the amendment in TurboTax, go to the retirement contributions section under Deductions & Credits, make sure that you have entered the $6,000 original contribution, then when TurboTax indicates that you made an excess contribution tell TurboTax that you had $4,010 of the contribution returned. TurboTax will prompt you to prepare an explanation statement where you'll indicate that you had $4,010 of your contribution returned but the adjusted amount distributed was only whatever amount was distributed due to investment losses. The explanation statement will take the place of the Form 1099-R so you can just ignore the 2023 Form 1099-R when you receive it.

Regarding your specific questions:

1. You must file an amended 2021 tax return to receive a refund of any excess taxes paid. However, TurboTax will remove the Form 5329 that had reported in Part IV the excess Roth contribution and penalty, so you'll have to prepare the corrected form 5329 manually so that you can show that $0 was the actual excess contribution and that $0 is the actual penalty. In your mailing you'll include that form along with Form 1040-X and your explanation statement. The Form 1040-X will only show a change to Other Taxes on line 10. All the other lines will show no change.

2. In response to your amendment, the IRS will refund of the penalty paid (or not originally refunded if you had an original overpayment of taxes, which seems unlikely) with your original filing.

3. There is no 10% penalty on the amount distributed as this return of contribution. Only taxable amounts are potentially subject to the early-distribution penalty. With no taxable earnings, none of this return of contribution is taxable.

4. The loss will only be reflected in your explanation statement. It will appear nowhere else in your amendment. Your AGI does not change.

5. You'll report the contribution for 2022 and it's return in 2022 TurboTax the same way that you'll report it with your 2021 amendment, only the amounts will be different in your explanation statement. With a loss, you won't actually have to enter the Form 1099-R. You can enter it, but it won't affect your tax return.