I have existing Traditional IRA and Roth IRA accounts. While doing my 2020 taxes I just realized my broker put my $7000 2019 Roth IRA contribution into my regular IRA account instead of my Roth IRA. I had a maxed out 401K so I wasn't eligible to contribute to the traditional IRA (although my company 401k failed the ADP/ACP test and I later got back more than I could have contributed to the traditional IRA but it shows up as 2020 income now, smh). SO what do I do now?
1. I already reported the $7000 as Roth and paid taxes on it in 2019, so can I transfer the 7000 to a Roth without doing extra paperwork? (Im fine losing the tax advantages for the investment income for one year on it just to avoid the headaches of IRS red tape but I don't want to leave it there forever and lose all the tax advantages of the Roth). Should be this easy but it's the government so I know it's not.
2. Since I got over 7000k back from my 401k I really could have put it in the traditional IRA (if they had refunded it in 2019 instead of 2020).. so it's kind of a wash? I imagine this isn't an option although it really should be.
3. Something else? What forms? amend 2019? etc
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1)If you convert the traditional IRA to Roth IRA then that whole amount will be taxable unless you had reported the contribution on Form 8606 as nondeductible. You might want to amend your 2019 return and report the traditional IRA contributions as nondeductible. Please see How do I amend a 2019 return in TurboTax?
2)To clarify, you can always contribute to a traditional IRA no matter how high your income is and that you contributed to a 401k, as long as you have taxable compensation. But the deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please see IRA deduction limits for details.
On your 2019 amendment you will have to remove the Roth contribution and the enter the nondeductible tradition IRA contribution:
If you convert the amount to the Roth IRA in 2021 then you will enter on your 2021 tax return:
1)If you convert the traditional IRA to Roth IRA then that whole amount will be taxable unless you had reported the contribution on Form 8606 as nondeductible. You might want to amend your 2019 return and report the traditional IRA contributions as nondeductible. Please see How do I amend a 2019 return in TurboTax?
2)To clarify, you can always contribute to a traditional IRA no matter how high your income is and that you contributed to a 401k, as long as you have taxable compensation. But the deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please see IRA deduction limits for details.
On your 2019 amendment you will have to remove the Roth contribution and the enter the nondeductible tradition IRA contribution:
If you convert the amount to the Roth IRA in 2021 then you will enter on your 2021 tax return:
I don't want to convert the whole Traditional IRA to a Roth (well I'd like to, but can't afford to). Sounds like I HAVE to amend my 2019 return to a non deductible contribution to my IRA and I will just lose the tax free withdrawal benefit that I would have had if it had gone into the Roth as it was intended. Is there typically a penalty involved in this?
My broker said there is nothing they can do on there end by the way.
Yes, if you cannot deduct the traditional IRA contribution because of the income limit you for sure want to amend the 2019 return and report the basis on Form 8606. That way, when you take it out later, the amount allocated to this will be tax-free.
No, there is no penalty involved in this.
Thank you. I did as you said. Softwear updated when I open the 2019 program and the Federal Return actually owed me another $61 even before I started. Bonus. Printed and ready to mail.
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