Withdrawal of excess contributions to Roth IRA causing 10% penalty?

Forum|Forum|1 year ago
March 20, 2025
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Back in mid 2022, I opened a Roth IRA with $6000. Unfortunately, our AGI for 2022 was slightly above the Roth IRA limit, but I didn't know it at the time. I have paid the excise tax penalties for 2022 and 2023. In 2024, I withdrew my excess funds of $6000 and received a 1099-R showing a gross distribution of $6000 (box 1) and a distribution code of "J" (box 7).

When I entered this information into Turbo Tax, it triggered a 10% penalty for early withdrawal. Why would it be a penalty for early withdrawal when I withdrew ONLY the original investment which was made with money from my savings (after-tax money). Am I missing something in Turbo Tax that I'm doing wrong?

dmertz

Employee

If you have made no other Roth IRA distributions in this timeframe, your basis in Roth IRA contributions should be at least $6,000. Make sure that you click the Continue button on the page that lists the Forms 1099-R that you have entered and enter or confirm your basis in Roth IRA contributions. TurboTax will us this basis on Form 8606 Part III to determine that your $6,000 distribution is not taxable and therefore not subject to penalty.

bagron007Author

I went through all of the questions after entering the 1099-R and it is still assessing a 10% penalty. I looked for form 8606 in TurboTax and on IRS.gov and could not find it. I can't find anywhere that it asks if it is a distribution of my original contribution in TurboTax. I also didn't see which question really pertained to the $6000 basis in the Roth. I had the following questions and answers in TurboTax:

1099-R info = (1)Gross Distribution $6000, (2b) Taxable amount not determined, (7) J-Early distribution from Roth IRA

-What did you do with the money? = Did something else with it (cashed out)

-Did you buy a home? = NO

-Was this withdrawal due to a 2023 or 2024 Qualified disaster? = NO

-Owned any Roth IRA for Five Years? = NO (opened in 2022)

-Were Any Roth IRAs open on Dec 31, 2024? = YES (I withdrew the excess contribution of $6000 but left the earnings since it was originally opened in 2022)

-Withdraw from Roth IRA BEFORE 2024? = NO (I made the excess contribution in 2022, I paid the 6% penalty taxes for 2022 and 2023 and then withdrew my excess contribution in 2024 but left the earnings).

-Enter Prior Year Roth IRA Contributions (confirm my net regular contributions prior to 2024 that REMAIN in the Roth IRA: = $0

-Any Roth IRA Conversions? = NO

-Enter Excess Contributions(Excess Roth IRA Contributions for Prior Years) = $0 (I took out the excess contributions made in 2022 prior to Dec 31 2024)

-Did you use your IRA to pay for any of these expenses? NO to all $0 (list of items that I didn't use the money for...I only took it out because I had to take out the excess contribution)

Then I got the "Based on your entries, your tax bill is $600, or 10% of the money you took out.

Am I answering one the questions incorrectly in TurboTax? Or is my 1099-R incorrect?

dmertz

Employee

"Enter Prior Year Roth IRA Contributions (confirm my net regular contributions prior to 2024 that REMAIN in the Roth IRA: = $0"

This is a badly worded question in TurboTax. It's asking for the amount of contributions that remained to be carried into 2024. Presumably that was $6,000 (or perhaps some other amount due to investment gain or loss), not $0.