How do I handle Traditional IRA Basis (Form 8606) after an excessive contribution, not deducted, is discovered & corrected years later ...

Forum|Forum|11 months ago
September 9, 2025
9 replies
203 views

For 2021, I made an excessive traditional IRA contribution of $7,000. No IRA deduction was taken on the 2021 return. Discovered in 2025 that the contribution was excessive, and made a corrective distribution, removing the contribution from the IRA. I am now preparing amended 2021 and following year returns with Form 5349 to report the 6% excise tax (penalty). I understand how to do that.

My question is about Form 8606, IRA Basis. A Form 8606 was not included with my original 2021 return for some reason, perhaps a misunderstanding or error on my part. Now, I would appreciate help in understanding how to handle the $7,000 excessive 2021 contribution amount (no IRA deduction was taken or is allowed to be taken for that) over time, so that it is properly tracked on my Forms 8606 for 2021, 2022, 2023, 2024 and, ultimately, 2025, the year the the $7,000 excess contribution was correctively distributed to me.

1. Should I include a 2021 Form 8606 with my 2021 amended return, since I omitted its inclusion originally?

2. If so, should that 2021 Form 8606 include the $7,000 excessive IRA contribution amount, since it was in the IRA during the 2021 taxable year, and not deducted on the 2021 return, even though it was discovered to be excessive and returned to me years later in 2025?

I have read that IRA basis doesn't include excessive contributions, which should be corrected ... ok, but how does the Form 8606 reporting work for interim years before the contribution is discovered to be excessive and a corrective distribution back to me is made?

Much appreciation for any insight. @DanaB27 -- your responses are so helpful to this community, tagging you in case you can reply.

Not A Product Question

Best answer by dmertz

I would not file a 2021 Form 8606 showing an addition to basis since that would not get subtracted out on your 2025 tax return unless you file a 2025 Form 8606 that does this. TurboTax will not do this, so you would have to file on paper. Section 408(d)(5) already specifies that such a distribution is nontaxable, so no involvement of Form 8606 is needed.

dmertz

Level 15

When entering the 2025 Form 1099-R, enter a zero in box 2a of TurboTax's 1099-R form instead of the $7,000 that should be present in that box of the Form 1099-R provided by the payer. After entering this Form 1099-R, click the Continue button on the page that lists the Forms 1099-R that you have entered and proceed through the steps until TurboTax asks you to provide and explanation of this corrective distribution of the excess after the due date of the 2021 tax return. Nothing will about this will go on your 2025 Form 8606. No adjustments to basis are needed, nothing on a 2021 Form 8606 either. You explanation statement suffices and will be included with your filed 2025 tax return.

BMEAuthor

Level 4

Thank you very much!

I think I will go ahead and include a Form 8606 with my 2021 1040-X, since none was included with my original 2021 return (a mistake, I think). On the Form 8606, I'll report the actual, correct IRA basis as I now, in 2025, know it to be, which will be no change from the prior year (2020) amount. I'll include with the 2021 Form 8606 an explanation that the $7,000 2021 excessive IRA contribution, nondeductible and not deducted on the original 2021 return, was correctively distributed back to me in 2025 when it was discovered, and is NOT being treated as an increase in my IRA basis as of 2021.

I understand that including such a 2021 Form 8606 with an explanation may not be necessary, but it will at least officially document the IRA basis as I believe it to be in this situation (and be an informative part of my 2021 Turbotax file & amended return). I know to be careful in tracking my IRA basis year by year, especially when excessive contributions and corrective distributions are involved. Hopefully, this sounds like a reasonable approach?