early withdrawal of non-deductible traditional IRA

[rjboyle]

While filing 2020 taxes I found the $6k traditional IRA contribution made in mid 2019 was non-deductible due to MAGI. I thought this was an  'excess contribution' so I removed $6k from the account before the 2020 tax filing date. As a result, TurbotTax does not show any IRA contribution or withdrawal in 2020. 

When I removed the $6k I did not calculate or remove net income attributable (NIA). Now I understand this was  not really an excess contribution, just a non-deductible contribution. 

One other issue is I withdrew the 'excess'  without notifying the brokerage in advance and so the 1099-R I received for 2021 shows as an early distribution. For my 2021 filing I decided best to play it safe and leave the 1099-R unadjusted/substituted and pay full taxes on the 'early distribution" (with some credit for the contribution being non-deductible).  Accordingly also amending the 2020 filing to show the non-deductible $6k contribution.

Any alternatives to this costly approach? One thought was to calculate the NIA as of the date of withdrawal and amend the 2020 filing to report only the NIA as a non-deductible contribution rather than the $6k. Then for 2021 file a substitute 1099-R or modify the 1099-R to show as a code "P -return of contribution taxable in 2020." But I was concerned that the 1099-R not matching what the brokerage filed would be a big red flag. 

[macuser_22]

It is not a "return of contribution" code P unless any earnings attributed to the excess was also removed at the time of the distribution and you paid the tax on the removed earnings in 2020. 

[dmertz · Accepted solution]

The reporting that you suggest is all you can do.  You made a nondeductible traditional IRA contribution for 2020 that needs to be reported on your 2020 tax return by amending and including From 8606.  Your 2021 tax return will report the regular early distribution.  The $6,000 from line 14 of your amended 2020 tax return carries forward to line 2 of your 2021 tax return to be used in calculating the taxable amount of your 2021 distribution (which will be $0 only if you had no funds in a traditional IRA at the end of 2021).  The taxable amount will also be subject to an early distribution penalty.

In 2021 TurboTax, be sure to click the Continue button on the page that lists the Forms 1099-R that you have entered, answer Yes when asked if you made nondeductible traditional IRA contributions, enter the $6,000 from line 14 of your 2020 Form 8606, enter your 2021 year-end balance in traditional IRAs and TurboTax will automatically prepare Form 8606 to calculate the taxable amount of your distribution.  TurboTax will also automatically include on your tax return the 10% early-distribution penalty on the taxable amount.