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jsd7
Level 1

2018 IRA Over Contribution

When filing 2018 taxes, I was advised that my spouse's IRA contribution was over the limit.  I withdrew the suggested amount before filing taxes.  However, when preparing 2019 taxes, I discovered that we were still $190 over on her limit.  I looked back at the 2018 taxes and sure enough Form 8606 showed the non-deductible contribution.  Not sure how I missed that during the QC process.  Regardless, now I'm in a dilemma.  TurboTax 2019 is asking if I've withdrawn the additional amount after the 2018 filing deadline.  I have not.  Furthermore, I've tried to work with Pershing (where the traditional IRA account is held) and they state they cannot do anything with our 2018 contributions.  What can be done?  Do I just reduce her 2019 contribution by $190?  We've taken distribution much more than that.  Should we do something else?  Thanks for your suggestions.

1 Best answer

Accepted Solutions
macuser_22
Level 15

2018 IRA Over Contribution

Nothing can be done now because it is beyond the time for a return of contribution.    You simply  have a "basis"in the IRA that will reduce the taxable amount on future distributions by a small amount.   Keep the 8606 and line 14 amount for future distributions.

 

You got caught in the trap of being in the phase out of deductible contributions.   Removing the exact amount of the non-deductible amount increased your MAGI which in turn created a new non-deductible contribution.   That must be accounted for and more that the amount should have been removed.

 

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.**

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2 Replies
macuser_22
Level 15

2018 IRA Over Contribution

Nothing can be done now because it is beyond the time for a return of contribution.    You simply  have a "basis"in the IRA that will reduce the taxable amount on future distributions by a small amount.   Keep the 8606 and line 14 amount for future distributions.

 

You got caught in the trap of being in the phase out of deductible contributions.   Removing the exact amount of the non-deductible amount increased your MAGI which in turn created a new non-deductible contribution.   That must be accounted for and more that the amount should have been removed.

 

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.**

View solution in original post

jsd7
Level 1

2018 IRA Over Contribution

Thank you so much for your timely and informative response!

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