Advice on reporting Roth IRA excess contributions + earnings when 1099-R will have conflicting info.

Question

I’m receiving contradictory info on how excess contributions I made in 2019 & 2020 should be filed with the IRS. While brokerage firms technically do not provide tax advice, they do compile my 1099-R on returned contributions + earnings and/or normal distributions taken on Roth IRA’s including the excess contribution correction I completed in Jan 2021. So if I file my return with info that doesn’t line up I suspect the IRS will flag it.

It would be highly appreciated if I could get some clarity on this as it’s honestly becoming a nightmare and monopolizing all my time. And for what it’s worth, I’ve sought professional assistance from CPA's on this topic offering to pay them to complete my taxes, and none seem to know how to handle the situation, which is shocking to be honest. I’m hoping to put this to bed once & for all with this post, and any advice with supporting tax code documentation would be appreciated.

So here are the details:

In Jan 2020, I opened a Roth IRA (my only one). Added $6k for 2019, and $6k for 2020. Earnings were accumulated via stocks that appreciated. In Jan 2021, realized I over-contributed based on my MAGI, then immediately liquidated my stocks and completed a single excess contribution correction form to withdrawal ALL funds in my Roth IRA account (that covered 2019 AND 2020 allowed contributions + excess contributions + associated earnings). Funds finished transferring over to my individual brokerage account Feb 2021, which is before the 2020 tax deadline.

note: I worked w/ 2 different reps at the brokerage firm; the first initially to complete the excess correction form in Jan 2021, then a second to get the 1099-R info just now in April 2021 to help me fill out my 2020 amended federal where I would report earnings on my excess contributions.

A. My brokerage firm provided the following guidance:

Since your contributions for 2019 & 2020 were both made in the 2020 tax year (Jan 2020), and the excess contribution correction form was completed before the 2020 tax deadline (Jan 2021), this is considered a timely withdraw of both. Your earnings from both will be added to your MAGI & taxed in the 2020 tax year. You will not need to pay the 6% penalty for 2019, nor 2020, but will have to pay the 10% penalty on earnings in the 2020 tax year since you’re under 59 1/2. Since a single excess correction form was completed, you will get a single 1099-R in Jan of 2022 that will have the following info on it:

In Box 1, will be the gross distribution of $12000 + earnings from it.

In Box 2a, will be the earnings from it only.

In Box 7, will be two codes “P” & “J”.

I mentioned that based on my MAGI, some of the contributions, and thus earnings, were actually considered “allowed” and not excess so wouldn’t those earnings be taxed in 2021 as a normal distribution added to my MAGI? To which the rep replied, since I claimed everything as excess, the earnings would be added to my 2020 MAGI and taxed in that year. And that if I would have split it up correctly, I’d still be paying taxes on the earnings, just in two different years.

The rep even bounced this off his colleagues that came to the same conclusion.

B. The advice I’ve gotten on the forum are in the two following links. One of the links is from a post of mine, while the second was posted by another member.

My post w/ answer on p.1:

https://ttlc.intuit.com/community/retirement/discussion/re-made-excess-contribution-for-new-roth-ira-in-jan-2020-withdrew-via-excess-contribution-form-in/01/1888444#M123380

Similar post w/ comparable answer on p.2:

https://ttlc.intuit.com/community/retirement/discussion/excess-roth-ira-contribution-made-in-2017-and-withdrawn-before-filing-in-2018-when-and-how-do-i-pay/00/559250

Questions:

1. Are the brokerage firm reps or the advice from professionals on this forum, correct and why? For instance, is there any IRS documentation to support the advice provided? The brokerage rep indicated his reasoning is outlined in Form 8606, but didn’t cite any specific sections, and told me to provide it to the tax professional. That's a start but it's still vague. So, if it's spelled out somewhere that would give me the confidence to lean one way or the other.

2. The info that will be included in my 2021 1099-R for 2019 / 2020 with doesn't line up with how tax professionals on this forum are asking me to report my excess contributions + earnings. Let's assume that the guidance on this forum is the correct way to report everything. Would that mean I would need to speak with my brokerage firm to have them amend my 1099-R to reflect that?

Tacking on some additional context to the end that’s important:

Based on the advice in the links above, I started amending my returns in early March 2021. I submitted a 2019 amended federal return on March 1 reporting the $6k contributions & paying the 6% penalty. The IRS cashed the checked, but I’m still waiting to hear back on if it was accepted / rejected. No 2019 amended state hasn’t been filed yet as I still need to wait on the federal status.

For 2020, both my federal / state were accepted in mid Feb 2021, but the excess contributions + earnings were not reported on them, nor was a second 2019 6% penalty (e.g. b/c I didn’t withdraw the 2019 excess contributions by Dec 31, 2020).

My orig 2020 fed / state returns were submitted w/out them b/c that’s the I guidance I was given early on by my brokerage firm AND some TurboTax reps I spoke to over the phone. Only when I later learned of the newer info in the links above did I start amending my 2019 2020 returns. And I only made this last post about conflicting info when I was amending my 2020 federal return and called my brokerage firm to get my 1099-R info, and they informed the info on my 1099-R was different than how I was reporting it on my amended returns.

macuser_22 · Answer

The answer I gave you previously is correct.

Your 2019 and 2020 contributions are separate and handled differently.

Your 2020 contribution was removed before the due date of your 2020 tax return so as long as the earnings attributed to the 2020 contribution was also returned then the 1099-R code PJ entered in the 2020 tax return will make it penalty free and only the earnings will be taxable income.

For the rules on this see https://www.irs.gov/publications/p590a

What if You Contribute Too Much?

A 6% excise tax applies to any excess contribution to a Roth IRA.

Withdrawal of excess contributions.

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with "Filed pursuant to section 301.9100-2" written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.

Your 2019 contribution (even though it was made in 2020 is still a 2019 contribution) must be reported on your 2019 tax return.

The due date for 2019 was April 15 (extended to July 15 because of COVID) 2020. Because the 2019 contribution was not removed until 2021, it was beyond both the 2019 due date and extended due date so is cannot get the treatment quoted above for 2020 and the 6% excise penalty applies for 2019 that requires that a 2019 5329 be filed with the penalty.

That 2019 excess was also not removed in 2020 and it was NOT a 2020 contribution so the "remove by due date" rules do not apply. Because that 2019 excess remained in the IRA the entire 2020 year then there is another 2020 excess that must be reported on another 2020 5329 form for the same 6% penalty a second time.

However, you do not report the earnings on the 2019 excess since removing the earnings only applies to the timely return of excess by the due date. Earnings are not a contribution and when the 6% penalty is applied the earnings are immaterial.

(What many financial institutions seem to overlook is that a 2019 contribution made *in* 2020 is still a 2019 contribution so the 2019 excess rules apply and not the 2020 rules.)

I hope that explains it.