Hi everyone. I made a deposit of $2000 to a traditional IRA and then realized I was not eligible for any deductions given my income and immediately withdrew the money, marking it as an excess contribution. I think I made $5 in the few hours it was in the account. Basically made an accidental deposit removed it the same day. I just got a 1099-R and it has me withdrawing this as a distribution and according to turbotax I need to pay taxes on the $2k withdrawal (10% penalty) and it seems to be treating it as additional income although it was already income I made (and paid taxes on) in 2022.
What should I do? Thanks!
You should talk to the IRA custodian and see if you can get them to issue you a corrected 1099-R. Otherwise you will have to pay the 10% excise tax (penalty) for early withdrawal, and also ordinary income tax based on the percentage of pre-tax and after tax funds you had in the IRA. But as I said, contact the custodian and try to get a corrected 1099-R.
So I gave them a call and they said they are not able to determine the taxable amount in 2a, so they list that as equal to the total distribution and check the 2b box "taxable amount not determined." They can't change the 1099-R. The problem is that I have to put this 2a amount into TurboTax and it treats it as additional income that needs to be taxed and I can't figure how or where to explain that this money was an after-tax contribution.
You can enter as a nondeductible contribution in the follow up questions and TurboTax will create the Form 8606 to remove it from your taxable income.
I did that and it created the form 8606 - but nothing changed about my refund. It still showing this distribution as additional income on the 1040. What should I be indicating on the follow-up questions? It doesn't seem to have any effect.
This is just a TurboTax thing- you do see it as income, but it is not part of your adjusted gross income. (You will notice it in program or on worksheets, not on your return). @crw636
Sorry I don't understand. It is showing up in my AGI. Using fake numbers but I have 300k from the W2 (1040 line 1a), and 2k from the distribution on 4a and 4b. This totals to 302k on line 10 and 11. My refund is clearly lower than if I don't enter a 1099-R at all and simulate what would have happened had I never done this. When I print out my return nothing changes.
If you entered this as a nondeductible IRA contribution and correctly created Form 8606 you will have $2,000 on line 4a and $5 on line 4b. But I suspect that you answered that you withdrew the excess contribution by the due date during the IRA interview.
To verify, did you make the traditional IRA contribution in 2022 for 2022 and withdraw it in 2022? It seems you made a regular withdrawal and did not request the withdrawal of excess contributions and earnings. Was the traditional IRA empty after the withdrawal?
It seems if you enter it as a nondeductible contribution and don't enter anything as withdrawn by the due date then you will have the 6% excess contribution penalty calculated On Form 5329 (unless your traditional IRA was empty on December 31, 2022) but you will only have the $5 earnings on line 4b.
If you state that you withdrew the excess contribution during the IRA contribution interview TurboTax will not create Form 8606 and you will have $2,005 on line 4b.
It seems you will need to talk to your financial institute to get a corrected Form 1099-R as DavidD66 suggested. It is important that they issue a Form 1099-R with the correct codes for the withdrawal of excess contribution plus earnings.
Yes I made the deposit and withdrawal on the same day in October 2022. Box 7 shows codes "1" and "8". I chose "Removal of excess contribution" when I made the withdraw. The account is empty and was at the end of 2022.
I need to create the situation that you mention - basically that just the $5 is taxed on line 4b. The only way I can do that is to edit the 1099-R fields and manually change box 2a from $2005 to $5, but that will no longer match the 1099-R and that doesn't seem right. Do you know how I should ask the payer to edit the 1099-R for this situation? The problem seems to be happening because turbotax is not realizing the distribution is from the contribution - so nothing I do to edit the contribution changes what is on the 1099-R so TurboTax still sees that $2005 as all taxable. @DanaB27
When you make your entry for your 1099-R you can change the boxes to reflect the correct taxable amount. A screen will pop up to explain the distribution (see the image below). This explains the nontaxable amount of your 1099-R. You will be taxed only on the $5 earnings as you should be.
That seems to be the best option for resolving it. I was worried if I change the 1099-R fields it wouldn't match what the IRS received - but this is the correct interpretation of what happened so I think I will change the 2b box from $2005 to $5 manually and provide the explanation that you mention. Thanks for all the help folks!!!