Withdrawal of excess Roth IRA contribution

Question

I have a question to ask the community about an excess Roth contribution.  I have a client that between them and their spouse made over the Roth IRA income limits for 2022.  I discovered that when preparing their tax returns.  They went to their IRA custodian and withdrew the funds.  They discovered that they had a $500 loss between the two of them so they withdrew $11,500 of their $12,000 initial contributions.  At their income level I believe the $500 loss will not be deductible as miscellaneous itemized deduction since the 2% floor to deduct misc. item. deduct. at $223,000 is $4460 and the $500 is the only misc. item. deduct. that they have.  My question is will they get a 1099 this year showing the distribution for 2022 or will it happen in 2023 with a prior year code. If I get a 1099-R this year will I have to explain that they had a loss and they had basis in the Roth IRA.  I just handle average people who don't make a lot of money and I have never encountered this in the past.  Also when I entered on the Roth IRA contribution worksheet that they each withdrew the $6000 contribution to the Roth account it eliminated the 6% penalty which is what I wanted.  My other question is should I report with the return as a miscellaneous note that they withdrew their contribution to the Roth account because the IRS may see on the 5498 that they contributed to the Roth or will the 5498 say zero because they took the contriubution out before 4-15-23.

qbteachmt · Accepted Answer

It's entered for tax year 2022, the same as if they got a 1099-R for it.

Don't forget to check the math for the allocation. That $500 might not be the allocatable loss, and there still is time to make another corrective distribution, should the math tell them otherwise. Or, they took too much and there is a small amount that will be taxed as earnings.

qbteachmt · Answer

This needs to be picked apart a bit.Yes, if you remove the excess by the due date of the return for the same year as the contributions, you have no excise penalty (the 6% on excess). You still use Form 5389 when there are other considerations such as early withdrawal; and Form 8606 for issues such as basis and earnings, as applicable.They needed to each take out their excess from the same account(s) they put it into. It's not like RMD and can't be combined across people or account type(s).I like, for instance:https://www.investopedia.com/what-to-do-if-you-contribute-too-much-to-your-roth-ira-4770686The loss is not deductible:https://www.investopedia.com/articles/retirement/05/012505.aspI don't know that losing $500 means taking out $500 less (unless that's the only amount they ever put in or had in those accounts). They have to do the math for overall allocation. Did they make that leap, or do the math? They have to be able to attribute the loss accordingly, otherwise.https://www.investopedia.com/net-income-attributable-definition-5223368https://www.investopedia.com/articles/retirement/04/042804.aspYes, there will be a 1099-R for 2023, and it might or might not be coded P for Prior year, but you all know that's what it will be, and reported for 2022.Don't overlook Pub 590-B.

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