Excess IRA Contribution in 2022; How to file amendment for withdrawal and Distribution

[Douglas317]

In 2023, I directed funds for both my wife and I into IRAs for Tax Year (TY) 2022 ($7,000 each) based on deferred compensation I received.  I am a retiree and I did not have any earned income, so the IRAs were a mistake on my part.  I realized this as I was finalizing my tax returns in October, 2023 and I attempted to reverse the IRA fundings.  My wife’s IRA funding was reversed in time to meet the deadline of October 15th.  However, my application was not completed by the Brokerage and I had to resubmit the reversal after the deadline.  The reversal was finalized on Nov. 17, 2023.

Since I submitted the original reversal ahead of time, I assumed it would be completed before the deadline. As a result, I didn’t include the IRA funding in my tax return.  In addition, I then received a 1099-R for TY 2023 for the reversal of the $7,000 Excess Contribution for my account.

As a result, I assume I need to file an Amended Return for TY 2022 to show the Excess IRA Contribution of $7,000 for myself and pay the penalty.  I also need to include the 1099-R for the Distribution of the Excess Contribution.  The 1099-R shows Distribution Code 7 (“Normal Distribution”) in Box 7, which when entered into TurboTax results in taxes being applied the reversed Excess Contribution.  The Brokerage has stated that they are following the IRS guidance.

Two questions:

•  Can I include the 1099-R for TY 2023 in my Amended Return for TY 2022 or do I need to include it on my TY 2023 return?
• How do I handle the 1099-R, which has Distribution Code 7 on it, so that I am not taxed on the Reversed Excess Contribution?

Thank you

[dmertz · Accepted solution]

Because you missed the deadline, your excess contribution for 2022 is required to have been reported on 2022 Form 5329 (and as a nondeductible traditional IRA contribution on Form 8606 and the 6% penalty paid.  If you did not, you must amend 2022 to include this.

When entering the code-7 2023 Form 1099-R into 2023 TurboTax, enter a zero in box 2a instead of the same amount as is in box 1 and be sure to mark the IRA/SEP/SIMPLE box.  Also proceed through the IRA contribution section and make sure that you indicate that you made an excess contribution for a year prior to 2023 and that you obtained a distribution of this excess after the due date of the tax return for that year (2022 in this case).  This will prompt TurboTax to treat the distribution as a nontaxable distribution of basis in nondeductible traditional IRA contributions and will cause TurboTax to prepare 2023 Form 5329 showing that the excess carried in from 2022 has been eliminated by this distribution.  However, it appears that TurboTax fails to properly reduce your basis by the amount of the distribution of the excess after the due date of the prior-year tax return, so you'll need to adjust that yourself.

[Douglas317]

That cleared the issue.

Thank you very much.