@JonBoy69 wrote:
So to avoid the amended return, isn't it easier to just fie form 8606 with the 2020 return and list the funds as non deductible. Then make the withdrawal in 2021 and re-deposit in the IRA for 2021 as deductible? Seems like less paperwork and avoids the amended return.
It does not quite work that way if this is an existing Traditional that has other funds. If you make is non-deductible the n the IRA will have a basis. If she withdraws it then it will be party or mostly taxable and also have an additional early distribution 10% penalty if she is under age 59 1/2.
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.
**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.**
