@TexTax wrote:
Made a $6000 contribution to wife's (pre-tax) IRA for Tax Year 2019 in March 2020. Just found out that it is non-deductible due to our combined income and my workplace retirement plan. From my understanding I can leave it or reverse it (without penalty) since I am within the same Tax year. Based on the tax basis at time of deposit I would have to withdraw $6844.
Questions:
1. If I leave it, the only consequence is that I get taxed again on the $6000 when I retire correct since this is an allowable contribution, just not deductible?
2. Do I have to withdraw this whole amount or can I just withdraw the $6000 and avoid paying income on the $844 in growth?
3. Would the taxes due on the $844 in growth be due on 2020 taxes since both deposit and withdrawal both occurred in 2020?
4. I wouldn't report anything about this transaction (the deposit or the reversal) on my 2019 taxes at all?
Thank you so much, really appreciate any advice.
#1 - *you* do not get taxed. it is your spouses IRA, not yours.
The non-deductible contributions are not taxed, but they can only be prorated on any future distributions.
You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).
For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.
TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.
#2 If your spouse want to the contribution can be returned as "a return of contribution" and not a normal distributions. The financial institution must be instructed to do that so the resulting 1099-R will be coded properly.
They must also calculate any earnings attributed to the contribution and return that also. The earnings are taxable income in the year that the contribution was *for*, not they year returned.
#3 answer in #2.
#4 This is ALL reported on your 2019 tax return if you request the return.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
