10% Penalty on 1099-R for ROTH IRA 'removal of excess' form - help needed!
I messed up big time and need some tax advice. I've been working overseas for several years and always file taxes with Form 2555 for my foreign earned income. Pretty straightforward most years. But back in December 2021, I opened a Roth IRA and contributed $5,400 without realizing I couldn't use a Roth IRA because all my income is excluded from US taxation through the foreign earned income exclusion. Once I figured out my mistake, I had to complete a "removal of excess/recharacterization" form with my investment company to reverse the $5,400 contribution. This generated a 1099-R for 2022 with Box 1 showing $5,400 and Box 2a showing $0.00. The distribution code is PJ. Now I'm using free tax software to prepare my 2025 return and it's saying I owe $540 to the Federal Government (looks like the 10% penalty). This doesn't seem right since it was a correction of an excess contribution, not an early withdrawal, right? Should I just be filling out something differently in the software, or do I need to hire a tax professional? I know I could file Form 5329 to claim the 10% penalty doesn't apply in my situation, but I'm worried this might cause problems down the road. Any advice is greatly appreciated!
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Lukas Fitzgerald
The good news is that you're right - you shouldn't owe the 10% penalty in this situation! When you remove excess contributions properly, the 10% early distribution penalty shouldn't apply. The issue is that your 1099-R with code P (principal distribution) and J (early distribution from a Roth IRA) combination often triggers the penalty calculation in tax software automatically. The software doesn't inherently understand the "removal of excess" context behind these codes. You absolutely should file Form 5329 to report and claim exception to the 10% additional tax. In Part I of the form, you'll enter your distribution amount on line 1, then on line 2 you'll enter the same amount as an exception - specifically use exception 12 which is for "Distributions of excess contributions from Roth IRAs." This will result in zero additional tax due. This is a fairly common situation, and properly filing Form 5329 with the correct exception code is exactly what the IRS expects in this circumstance. It won't get you in trouble - it's the proper way to handle this situation!
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Ev Luca
•Thanks for the information! So I need to find where to add Form 5329 in the tax software? Does the exception code need to be entered in a specific field or is there usually a dropdown for "reason for exception"? My software interface is confusing me.
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Lukas Fitzgerald
•Most tax software has a section for "Additional Taxes" or something similar where you can find Form 5329. Look for options related to "Early distributions" or "Retirement plan taxes." Once you locate Form 5329 within the software, you'll typically find fields that match the paper form. Enter your distribution amount from Box 1 of your 1099-R ($5,400) on the appropriate line, then look for either a dropdown menu or a field where you can enter exception code "12" for excess contributions removed from a Roth IRA. The software should then automatically calculate zero additional tax.
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Avery Davis
I ran into this exact issue last year after contributing to a Roth while working abroad. The https://taxr.ai document analysis tool saved me so much stress! I uploaded my 1099-R with the PJ code and it immediately flagged that I needed Form 5329 with exception code 12 for removing excess contributions. It walked me through exactly where the issue was in my return and provided the exact steps to fix it in my tax software. Their system also explained that the J code was triggering the penalty calculation automatically but shouldn't apply in this situation. Wish I'd known about it before spending hours researching this issue on my own.
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Collins Angel
•Did it actually work though? I'm in a similar situation (contributed to Roth when I shouldn't have qualified) and got the same 1099-R codes. Did the IRS accept your return without issues when you used the exception?
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Marcelle Drum
•I'm skeptical about using tools like this. How does it actually help beyond what free resources like the IRS website already tell you? Couldn't you just Google this information?
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Avery Davis
•Yes, it absolutely worked. The IRS processed my return without any issues or follow-up questions. The key was correctly filing Form 5329 with the proper exception code, which the tool helped identify and walk me through. Google can definitely help with general information, but the tool does more than just provide generic advice. It analyzes your specific tax documents and identifies the exact issues related to your situation. It's like having a tax pro look over your specific forms but much cheaper. For complex situations like retirement account corrections with specific distribution codes, having something that can interpret your exact 1099-R and tell you precisely what to do was worth it for me.
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Marcelle Drum
Just wanted to update everyone. I was skeptical about taxr.ai but decided to try it after continuing to get nowhere with my tax software. Uploaded my 1099-R with the PJ code and it immediately recognized the excess contribution removal scenario. The tool provided step-by-step instructions for completing Form 5329 with the correct exception code in my tax software. What really impressed me was the detailed explanation of why the distribution code J was triggering the penalty calculation even though it shouldn't apply in my case. It saved me hours of research and prevented me from paying a $540 penalty I didn't actually owe. My return was accepted by the IRS without any issues. Definitely worth checking out if you're dealing with complex retirement account situations!
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Tate Jensen
If you're still getting stuck with this after trying Form 5329, you might need to talk directly to an IRS agent to sort it out. I had a similar issue and spent WEEKS trying to get through to the IRS. Finally found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they got me connected to an actual IRS agent in about 20 minutes when I'd been trying for days. The agent confirmed exactly what to do with the Form 5329 for excess Roth contributions and explained why the tax software was calculating it wrong. They even noted something in my account so if there were any questions later, there'd be a record of our conversation. Saved me from paying a penalty I didn't owe.
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Adaline Wong
•How does this service even work? The IRS phone lines are notoriously impossible to get through. Is this some kind of express line or something?
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Gabriel Ruiz
•Sounds like a scam honestly. No way someone can magically get through IRS phone lines when millions of Americans can't. They probably just keep you on hold themselves and charge you for the privilege.
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Tate Jensen
•It's not an express line - they use an automated system that continually redials the IRS for you and navigates the initial phone tree. When they finally get through to the hold queue, they call you to join the call. You only pay if they actually connect you. I was super skeptical too! I spent three days trying to call myself, always getting the "we're experiencing high call volume" message. With Claimyr, I was speaking to an actual IRS agent within about 20 minutes after they called me. The IRS agent was definitely legitimate - she accessed my tax records and everything. It's just a system that handles the frustrating part of getting through the initial barriers of the IRS phone system.
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Gabriel Ruiz
I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway out of desperation with my excess Roth IRA contribution issue. Within 15 minutes of using their service, I was talking to an actual IRS representative who confirmed everything about the Form 5329 exception for excess contributions. The agent walked me through exactly how to complete the form to avoid the 10% penalty and explained why the tax software was calculating it incorrectly. They even added notes to my account about our conversation. Resolved my issue completely and saved me from paying $540 I didn't actually owe. Completely worth it just for the peace of mind knowing I'm filing correctly.
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Misterclamation Skyblue
Make sure your tax software is properly reporting the "J" code from your 1099-R. Some free tax software might not handle the excess contribution removal codes correctly. If you input the 1099-R and it's still showing the penalty, you might need to manually override it with Form 5329. I also had a similar issue with foreign earned income and Roth contributions. The key is making sure Box 7 of your 1099-R shows both the P and J codes, and then properly filling out Form 5329 with exception code 12.
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Nadia Zaldivar
•Thanks for the tip about checking the codes! My 1099-R definitely shows both P and J in Box 7. I'll make sure the software is reading both codes correctly. Did you end up having to file Form 5329 separately or were you able to include it with your regular return through the software?
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Misterclamation Skyblue
•You can include Form 5329 as part of your regular tax return through the software - no need to file it separately. Most tax software has a section for additional forms where you can find 5329. Just make sure you're selecting exception code 12 specifically for "removal of excess contributions.
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Peyton Clarke
Has anyone actually had the IRS challenge their Form 5329 exception for excess Roth contributions? I'm worried about audit risk if I claim the exception.
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Vince Eh
•I've done this exact thing for 3 years (kept making the same mistake with foreign income and Roth contributions) and never had an issue. As long as you have documentation showing you properly removed the excess contribution, you're doing exactly what the IRS procedures specify.
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