2017 Roth IRA excess contribution: when to report?

[bortman]

My questions:
I have a 2018 1099-R that documents the withdrawal of my 2017 excess contribution + earnings from a Roth IRA. Do I need to include this in my 2018 return? Or do I need to amend my 2017 return? Will I receive a 2019 1099-R for the 2018 portion of the earnings?

Backstory:
For TY2017 I made an excess contribution to my Roth IRA with Vanguard. Some miscalculations and poor forecasting meant that my modified AGI was slightly above the limit that allows for Roth contributions.

In Feb 2018 I realized that I had made the excess contribution while I was in the throes of completing my 2017 return. I immediately spoke with a Vanguard CSR who guided me through the process of withdrawing the excess and earnings. He explained that Vanguard would send a 2018 1099-R in Jan 2019, and that I should report the withdrawal on my 2018 return. I would have to pay taxes on the earnings, as well as a 10% penalty.

Sure enough, in Jan 2019, Vanguard sent me a document labeled "2018 Form 1099-R / Distributions From Pensions, Annuities, Retirement Plans ..." that reflects the withdrawal.

The 2018 1099-R's Distribution Code (Box 7) lists "PJ".

P—Excess contributions plus earnings/excess deferrals (and/or
earnings) taxable in 2017.

J—Early distribution from a Roth IRA, no known exception (in most
cases, under age 59-1⁄2).


In Feb 2019 (yesterday) I called Vanguard to ask for clarification. This time the CSR explained that I should amend my 2017 return with the information from the 2018 1099-R.

I asked if I should expect to receive a 2019 1099-R in Jan 2020 for the 2018 portion of the earnings. The answer: no. I explained to the CSR that reason I asked is because I thought that 2018 1099-R reflects only the 2017 portion of the earnings and I didn't make the withdrawal until Feb 2018 .. so that's 1-1/2 months of earnings in 2018. The answer was still no, I won't get a 2019 1099-R related to the excess withdrawal.

Is this just a question of the granularity that the IRS requires, or the granularity that Vanguard can document? What if I had requested the withdrawal at the end of 2018? Is there a threshold for the time into the following year(s) that

I'm asking all this because I'd like to avoid having to amend both my 2017 and 2018 returns.

Apologies for the long-winded backstory, and thanks in advance for any insights.

[secondcor521]

You should have only taken credit (for the Retirement Savings Credit, for example) for the net actual contribution to your Roth IRA - in other words, your original contribution minus the excess contribution that was returned to you.

You should have reported the excess contribution that was returned to you on line 15a of your 2017 Form 1040.  You should have reported the net income attributable (the earnings on the contributions while they were in the IRA) on line 15b of your 2017 Form 1040.  You should also have included an explanatory statement.  You should also, if you were under 59 1/2, paid a 10% penalty on the net income attributable via Form 5329.

Even though you received the money in 2018, the IRS is very clear that the earnings are treated as taxable income for the 2017 tax year and should be reported on the 2017 tax return.

For all of the items in the previous paragraph, you can read about it directly in the 2017 instructions for Form 2017, page 5, middle column, "Return of IRA contributions" here:  https://www.irs.gov/pub/irs-prior/i8606--2017.pdf

For all of those items in the second paragraph, you will need to file an amended return for 2017.  This will be a Form 1040-X, plus you'll need to add Form 5329.

In other words, the Vanguard CSR with whom you spoke in February 2018 was mistaken.  The Vanguard CSR with whom you spoke yesterday was correct.

...

The 2018 1099-R should have on it all of the earnings attributable to your excess contribution listed on it.  It should include the excess earnings from the entire time from your original contribution in 2017 to the withdrawal in February 2018.  I don't believe that you will receive a 2019 1099-R because there is no need for it.  You can confirm this by comparing the numbers on the 1099-R with the amount that was returned to you in February 2018 - they should match exactly.  BTW, "PJ" is the proper set of distribution codes for the circumstances you describe.

HTH.

[bortman]

Thanks for the help secondcor521 .. really appreciate it.

I'm a longtime TaxAct user, so I headed back to my 2017 return to make the adjustments.

After following TaxAct's prompts I was able to get my return to look close to what I expected. Specifically, it added forms 1040X, 5329, and 8606, and the bottom line showed that I owe close to the amount that I think I should. I was charged the 10% penalty for earnings on early-withdrawn amount, which was expected, but I wasn't charge 6% penalty.

[secondcor521]

Thanks for the help secondcor521 .. really appreciate it.

I'm a longtime TaxAct user, so I headed back to my 2017 return to make the adjustments.

After following TaxAct's prompts I was able to get my return to look close to what I expected. Specifically, it added forms 1040X, 5329, and 8606, and the bottom line showed that I owe close to the amount that I think I should. I was charged the 10% penalty for earnings on early-withdrawn amount, which was expected, but I wasn't charge 6% penalty.

Glad to help.  Regarding the 6% penalty, you do *not* owe that because you removed the excess contribution before the due date for your 2017 return.  The 6% penalty only applies if you leave an excess contribution in there after the due date.  Incidentally, the 6% penalty applies each year an excess remains (i.e., it is a recurring penalty).