Excess contribution to Traditional IRA

[wilu0000]

Hello,

Hoping someone can help me finish my taxes, thank you in advance for your help.

From turbotax, it says that I can only deduct 6316 of my 7000 IRA contribution. I did not have enough earned income this year as I lost a job. How is this number calculated? Because of this, I now have a non-deductible excess contribution of 648. Is this the amount I should withdraw from investment company or do I need to calculate and add earnings to that before withdraw request? Now after that, how do I go about filling out a 1099R if I don’t receive it this year?

[MaryK4]

You have a nondeductible contribution of 648, but it is NOT an excessive contribution that is subject to the additional penalty of 6%.  

The amount of your contribution is limited to your compensation for the year minus a few adjustments.

So- you are not required to withdraw the $648, it just cannot be used as a deduction to reduce your taxable income.  Because you cannot deduct it, it was not be taxed when you take a distribution in the future (it is your basis).

If you decide to keep it in your account, TurboTax will complete a form 8606 to report the nondeductible contribution to the IRS so that you are not taxed on it in the future.

Please let us know if you have other questions!

[wilu0000]

Thank you for your response. When I enter the contributed 7000, it still states that I have a penalty. 

Because you made an excess contribution of $684 to your traditional IRA, you will owe a 6% penalty ($41) each year that excess money remains in the IRA.

How do I to get around this? Do I just continue?

[DanaB27]

If you have an excess contribution then you need to request the return of excess contribution plus earnings by the due date (including extensions). The earnings will be taxable in the year the contribution was made.

If you made an excess contribution in 2024 and withdrew the 2024 excess traditional IRA contribution plus earnings in 2025 before the due date, then you will get a 2025 Form 1099-R in 2026 with code P and 1. This Form 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2025 Form 1099-R into the 2025 tax return since the withholding is reported in the year that the tax was withheld. The 2025 code P will not do anything to change the income in the 2025 tax return income but the withholding will be applied to 2025.

To enter a 2025 Form 1099-R in your 2024 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2024?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter P and 1
9. Check the "IRA/ SEP/ SIMPLE" box
10. Click "Continue"
11. On the "Which year on Form 1099-R" screen say that this is a 2025 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024.

Also make sure you indicate in the IRA contribution interview that you withdrew the excess contribution by the due date:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Traditional IRA”
4. Enter the Traditional IRA contribution
5. Continue until the penalty screen and enter the excess contribution amount withdrawn.

[wilu0000]

Thank you for your response. I just have a quick question, on step 13, is this the contribution + earning (gross/total distribution) together?

[DanaB27]

You only need to enter the earnings. Only the earnings are taxable and will be entered on line 1 of Form 5329. Therefore, you only need to enter the earnings that will go on line 2 of Form 5329 with exception code 21.