Excess Roth Contribution

[artp]

Taxpayer made a $7000 Roth contribution in early 2021 and now realizes that he will exceed the income limitation (AGI will be $240K on MFJ- he does not have any tax losses or deductible expenses to reduce AGI) and will need to pull that money out of his Roth account which can be easily done. It is my understanding that if there are any earnings on the $7000 they must also be pulled out and nothing will be taxed.  But what happens ii there is a market decline on the $7000 and now it is only worth $6800? Does he need to pull out only $6800 or $7000. What to report (if anything) on his 2021 tax return?

[Corduroy Frog]

Great question.  Some time ago I had learned that this gave rise to an miscellaneous itemized deduction.  This could have changed in the 2018 overhaul.

[Corduroy Frog]

Just now, Corduroy Frog said:

 

 

[Terry D EA]

Both the excess contribution and the earnings as a result of the excess contribution must be withdrawn to avoid the penalties. Here is an article that will explain things very clear. Hope this helps.

Roth IRA Excess Contribution | The Motley Fool

[jklcpa]

11 hours ago, artp said:

But what happens ii there is a market decline on the $7000 and now it is only worth $6800? Does he need to pull out only $6800 or $7000. What to report (if anything) on his 2021 tax return?

If you go through the calculations and it is indeed a loss instead of earnings, then the client needs only withdraw the $6,800 in your example.  The 1099R should be issued for the withdraw of $6,800 with a taxable amount of -0- and code 8.  You might have to fool the software so that it doesn't try to charge the 6% penalty on the $200 decline in value.  Also, losses on IRAs in the final year of distribution are no longer deductible as a miscellaneous itemized deduction on Sch A.

It is my understanding that if the client has multiple Roth IRA accounts, only the one that received the excess contribution needs to be included in the calculation of the income portion of the distribution. Also, if the Roth IRA was a new account that was opened with this excess contribution, then distributing the entire account balance will satisfy the withdraw of excess+income requirement.

[artp]

Thanks for all the replies and the link from Terry D.  I look forward to view the 1099R.  I appreciate your help.