overcontribution to a traditional IRA for 2021 tax year

If you leave the excess traditional IRA contribution in your account then you will have to pay the 6% penalty each year until the excess is removed or absorbed by applying it to a year when you are allowed to make a contribution.

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Enter your contribution and TurboTax will calculate the 6% penalty on Form 5329.

If you withdraw the excess contribution plus earnings by the due date (make sure you use the correct form with your financial institute) you can avoid the 6% penalty. You will follow these steps:

 Click on "Search" on the top right and type “IRA contributions” 

1. Click on “Jump to IRA contributions"
2. Select “traditional IRA”
3. Enter your contribution
4. On the penalty screen enter the contribution amount (without earnings and losses) as withdrawn by the due date 

The earnings are taxable in 2021 and are subject to a 10% early withdrawal penalty if you are under 59 1/2. You will get a 2022 Form 1099-R in 2023 with codes P and 1. This Form 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 2022 Form 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 Form 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything to the 2022 tax return but the withholding will be applied to 2022.

To create a Form 1099-R in your 2021 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 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 enter the earnings
8. Box 7 enter P and 1 
9. Check the "IRA/ SEP/ SIMPLE" box
10. Click "Continue"
11. On the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")