Non Deductible IRA Contribution and Form 5329

[rkbuss]

In 2018 and 2019 Non Deductible IRA Contributions had been made because we made to much to contribute to the IRA.  Form 8606 was completed in 2018 and 2019 for the Non Deductible Contributions. Except for 5329 was not completed in 2019, 2020 and 2021. After review, no additional taxes were due, should we still file amended returns for those years and simply complete Form 5329 for 2022?  The Non Deductible amounts were $3,000 and $1,000

[MaryK4 · Accepted solution]

Your contributions are below the maximum contributions for tax years 2018 and 2019 so a Form 5329 is not needed because there is no excess contribution.  The income limitation that applies to traditional IRAs applies to the deductibility, which you already indicated you did not deduct, hence the 8606. 

You can open and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year.  You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. (Who Can Open a Traditional IRA?)

[rkbuss]

Thanks for your help MaryK4. Another question, how can I change these non deductible contributions of $5,100 to deductible contributions? Can I show the $5,100 as an IRA deductible amount on the 2022 filing and then change the basis from $5,100 to zero?

[DanaB27]

If you are referring to your 2022 traditional IRA contribution then you can select to make it deductible during the IRA contribution interview but only if your deduction isn't limited because you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please review IRA deduction limits for details.

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
6. Enter the amount you contributed
7. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
8. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had a nondeductible contribution before this tax year.
9. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
10. On the “Choose Not to Deduct IRA Contributions” screen choose “No, I'll keep my deduction” (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning, and then a screen saying $0 is deductible).

For prior years if you weren't allowed to deduct the traditional IRA contributions because of income and retirement plan at work then you cannot select to make them deductible. If you didn't exceed the income limit and are allowed to deduct the traditional IRA contribution then you would have to amend the returns to select to make the traditional IRA contribution deductible.

[rkbuss]

Can the $5,100 be recharacterized to a Roth IRA?  The $5,100 is in a Traditional IRA account that has had deductible contributions in past years prior to 2018. Or, is it it better to simply leave the $5,100 in the traditional IRA and maintain the most current 8606 form that was completed and withdraw funds from the traditional IRA when eligible and without penalty?

[DanaB27]

Yes, if you are allowed to make Roth contributions then you can recharacterize your traditional IRA as a Roth IRA contribution. Roth IRA contribution may be limited based on your filing status and income. Please see 2022 - Amount of Roth IRA Contributions You Can Make for 2022 for details.

In your case, it might be more beneficial to recharacterize the 2022 traditional IRA contribution as a Roth IRA contribution (if your Modified Adjusted Gross Income allows it) since then the earnings can grow tax-free. Qualified Distributions from a Roth IRA are nontaxable. In addition, you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free.

You have until the due date to recharacterize your contribution, please contact your financial institute. If you decided to do this you would enter the following steps in TurboTax:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “traditional IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the traditional contribution amount
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $5,100 plus $xxx.xx earnings (or loss) were recharacterized.

You will get Form 1099-R for the recharacterization with code R-Recharacterized IRA contribution made for 2022 and this belongs on the 2022 return. But a Form 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore Form 1099-R with code R when you get it in 2024.

@rkbuss