Excess IRA nondeductable contribution distribution procedure

[starckca]

If an excess nondeductable amount was made to a traditional IRA in 2021, how is the distribution handled in 2025?

[Opus 17]

That depends on how you filed in 2021, 2022, 2023 and 2024.  I assume you did not remove the excess.  Did you include form 5329 in each of those years and pay penalties?  Did you include form 8606 in 2021 to track the non-deductible basis?

Also, let's clarify what you mean by "Excess".  In 2021, you could contribute up to $6000 to any IRA, or $7000 if you were over age 50, or up to the amount of your compensation from working (wages or self-employment income).  You can contribute that amount no matter what your other income and tax situations are.  You might not be allowed to contribute to a Roth IRA, and you might not be allowed to take a tax deduction, but you can always contribute $6000 (or $7000).  And the IRA broker should not allow you to contribute more than that amount, unless you have more than one IRA account at different brokers.

So to start, what do you really mean by "excess"?  

Did you include form 8606 with your 2021 return?  

Did you make any additional non-deductible contributions in following years, and if so, did you include form 8606 to update your basis?

Did you include form 5329 on your 2021 and every following year tax return?

[starckca]

I overcontributed $2333 nondeductible in error in 2021 over the $7000 allowed , but I did not take a distribution until 2025. I took a distribution of $6000 in 2025. I did not file a 8606 form in any of the years 2021 through 2024. I have prepared form 5329 to file now for each of those years to pay the 6% penalty.  

My question is how do I enter this in TurboTax desktop so that the $2333 in not taxed again? The taxable amount of the $6000 2025 distribution should be $3667 shouldn't it?  Is form 8606 required (I have never filed it before but it shows in the carryover worksheet). 

[Opus 17 · Accepted solution]

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@starckca wrote:

I overcontributed $2333 nondeductible in error in 2021 over the $7000 allowed , but I did not take a distribution until 2025. I took a distribution of $6000 in 2025. I did not file a 8606 form in any of the years 2021 through 2024. I have prepared form 5329 to file now for each of those years to pay the 6% penalty.  

My question is how do I enter this in TurboTax desktop so that the $2333 in not taxed again? The taxable amount of the $6000 2025 distribution should be $3667 shouldn't it?  Is form 8606 required (I have never filed it before but it shows in the carryover worksheet). 

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It's going to be taxed due to the pro rata rule, unless your only contributions to any traditional IRA ever are non-deductible.

You need to file an amended 2021 return that includes form 8606 which documents the non-deductible basis, as well as form 5329 for the penalty.

Then you need to prepare and file form 5329 for 2022, 2023 and 2024.

Then you will file a new copy of form 8606 with your 2025 return.  The pro rata rule means that only a portion of your withdrawal is non-taxable.  For example, if you contributed $7333 in 2021 of which $2333 was non-deductible, then $2333 is your basis.  Suppose you contributed an additional $6000 in 2022, 2023, 2024 and 2025.  Your total basis is still $2333.  Your current balance as of 12/31/25 might be let's say $35,000.  Since your basis is $2333, that's 6.66% basis.  So 6.66% of the withdrawal is non-taxable ($155.51) and the remainder is taxable.  Your new basis is $2177.49, and that is reported on form 8606.  You must keep the new copy of form 8606 for as long as you live, or until the next time you make a withdrawal, and you will use the pro rata rule again to calculate the non-taxable percentage based on the carryover of your basis.  If you don't track your basis on form 8606, then all withdrawals from traditional IRAs are taxable, the IRS does not keep track of your non-deductible basis for you.