Hi..
In tax year 2020 I was retired collecting Social Security and my wife was working full time. She had enough income to allow me to open up a traditional IRA for the maximum allowed which is $7,000. This was done primarily to reduce the amount of taxes we owed.
After my new IRA account was opened I was presented with an option on my brokerage site asking if I wanted to contribute $7,000 for the 2021 tax year. Without giving it much though I had $7,000 transferred from a money market account.
After reading up on the rules for IRA contributions I think I erred in contributing the $7,000 for tax year 2021. My wife retired on 01/15/2021. She was paid for the two weeks in January she was still working as well as about a week that was held. Now our sole income for 2021 is from our Social Security benefits, a small pension I have (~$2,000/yr) and some small interest and dividends.
Based on what I read, in order to contribute $7,000 for 2021 we would need an earned income of at least that amount. I also read that SS benefits is not considered earned income. I'm not sure about my pension or the interest and dividends. Our earned income for 2021 will nowhere be enough to allow a $7,000 contribution for 2021 If SS benefits is not earned income.
If I withdraw the $7,000 contribution I made for 2021, say to a non IRA account, I don't want it to be taxed as it came from a money market account and I didn't take it as a deduction nor did I plan to do so unless it is allowed. I don't want to get any surprises when I do my 2021 taxes.
How should I handle this situation without having to pay tax on the seemingly not allowed $7,000 and any penalty?
