Filing a Return of Excess from IRA

[lchan]

Please forgive my naiveté when I tell you what happened..

I opened up an IRA account maybe 20 years ago (in my early 20's) and contributed to it here and there. I started working for my current employer back in 2011 and started paying into my employer's retirement account, while still contributing towards the IRA (some years only $2500, some years $5000, it varied year to year).

I only found out in 2023 that it's illegal to contribute to both retirement accounts, at which point I stopped contributing to the IRA.

My income has always been too high to ever claim a deduction from contributing to the IRA. 

I was recently made aware of the Return of Excess form for contributions made beyond the federal limit. 

My questions are...

*Is there a statute of limitations on needing to file a Return of Excess form? Because I made additional contributions starting in 2011 (again, never took a deduction), is a form required for a tax year that was 14 years ago?

*Because I never took a deduction from any of the IRA contributions I made, does anything need to be done at all?

*There are some years that my retirement contributions didn't fully meet the federal limit, in that case is my IRA contribution okay, so long as the total between the two contributions didn't go over the federal limit?

Please help me figure this out. I will try and answer any questions you have if further clarification is needed. How bad did I mess this up?

Thank you,

lchan

[Opus 17]

It is not illegal to contribute to an IRA if you also participate in a qualified workplace retirement plan.  You might not be eligible for a tax deduction, but you can still contribute.  You just have to make certain adjustments for the nondeductible amounts.

A "return of excess" is a special procedure that can only be done up to October 15 of the year after the ineligible contributions.  If your last potentially ineligible contribution was in 2023, it is too late to even think about the "return of excess" procedure as a way to fix this.

Are you sure you were never eligible for the deduction?  In 2011, the deduction phase-out started at $56,000 for single and $90,000 for married filing jointly.  Did you make more than that, even 14 years ago?

The 2023 deduction phase-out started at $73,000 for single and $116,00 for married filing jointly.

Are you sure that you have been over the deduction limits ever since 2011?

Let's start by clarifying that, then we can see what we think next. 

[lchan]

@Opus 17 That is correct, for all years we had an income greater than what was eligible to claim the deduction. 

We file Married Filing Jointly.

I did some more digging and realized that for several years the total contribution made between my employer's retirement account and the IRA was less than the federal limit for that year. 

But between years 2016 and 2022, the total contribution between the two was higher than the limit for each year. The amount over varies year to year, but they are all over the limit.

[Opus 17]

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@lchan wrote:

@Opus 17 That is correct, for all years we had an income greater than what was eligible to claim the deduction. 

We file Married Filing Jointly.

I did some more digging and realized that for several years the total contribution made between my employer's retirement account and the IRA was less than the federal limit for that year. 

But between years 2016 and 2022, the total contribution between the two was higher than the limit for each year. The amount over varies year to year, but they are all over the limit.

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I think you are still confused about the contribution limits.  You are always allowed to contribute up to the maximum to a traditional IRA ($5000, $6000, or $7000 for the years we are talking about.), even if you contribute to a workplace plan.  The limits do not combine.  

For example, in 2025, the total limit for contributions to a workplace plan like a 401(k) is $23,500 for the employee salary deferral, and $70,000 from employer plus employee.  Even if you and your employer max out the 401k, you can still contribute up to $7000 to a traditional IRA.

The problem is that you took tax deductions that were not allowed.  The contributions themselves are fine.

However, if you used software for any of these years, the software should have prevented you from taking a tax deduction based on your income.  Do you know if you actually took the tax deduction for all years 2011-2023?  If you made the contribution but did not take the deduction, you would have a form 8606 with your tax return.  If your last IRA contribution was in 2023, does your 2023 tax return include a form 8606?

[lchan]

@Opus 17 That is correct. I have filed with TurboTax for several years now and I do remember getting the message saying that my income was too high and I was not eligible for the deduction from the IRA contribution. 

With regards to the 2023 return, yes, form 8606 is included (same with earlier years too).

[Opus 17]

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@lchan wrote:

@Opus 17 That is correct. I have filed with TurboTax for several years now and I do remember getting the message saying that my income was too high and I was not eligible for the deduction from the IRA contribution. 

With regards to the 2023 return, yes, form 8606 is included (same with earlier years too).

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Form 8606 is used to keep track of contributions that are allowed, but not deducted.  Line 14 should be approximately the total of non-deductible contributions that you have made (contributions since joining your employer's plan).**

The impact of non-deductible contributions is that you did not take a tax deduction when you made the contribution, so you do not pay tax on that portion when you withdraw.  

For example, if your IRA balance is $100,000 and you have a form 8606 documenting that you have $40,000 of non-deductible contributions, and you make a withdrawal, that would mean that since 40% of the account represents contributions you already paid tax on, then 40% of the withdrawal is tax-free and only the other 60% is taxable. 

To claim this adjustment, you need to keep the most recent form 8606 for use when filling out any tax return that has an IRA withdrawal, conversion or rollover.  That return will generate an updated 8606, that you keep until the next time you have a withdrawal or contribution.  That means you need to keep your 2023 form 8606 until you retire and start withdrawing.  This is an exception to the general rule that you should keep tax papers for 3 or 6 years.  

Assuming your non-deductible contributions were properly reported, then you have done everything right and have nothing to fix and nothing to worry about.  Just save that form 8606 until you retire, or until the next time you contribute, withdraw, convert or rollover your IRA.

**If form 8606 line 14 does not have all your non-deductible contributions going back to 2011, I would probably ignore it and move on.  The IRS can only audit you for 6 years, so as long as you reported your non-deductible contributions on form 8606 from 2019 onward, I would forget about any errors or omissions from 2018 and earlier.  

[lchan]

@Opus 17 

Wow! You have been so helpful with all of this!

Looking over 8606 Line 14 from previous forms, the values don't quite make sense. 

In 2023 Line 14 was $3,600.

In 2022 Line 14 was $2,400.

In 2021 Line 14 was $12,000.

Again, I always file with Turbo Tax so it's interesting that something happened with the 2022 filing that the value wasn't carried over from 2021. 

Thanks again @Opus 17 . I really appreciate your help and explanation!

[Opus 17]

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@lchan wrote:

@Opus 17 

Wow! You have been so helpful with all of this!

Looking over 8606 Line 14 from previous forms, the values don't quite make sense. 

In 2023 Line 14 was $3,600.

In 2022 Line 14 was $2,400.

In 2021 Line 14 was $12,000.

Again, I always file with Turbo Tax so it's interesting that something happened with the 2022 filing that the value wasn't carried over from 2021. 

Thanks again @Opus 17 . I really appreciate your help and explanation!

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Assuming you did not either make a withdrawal, or have a drop in income so that you were eligible for the deduction, then the numbers on form 8606 should always increase.  It's hard to offer specific help without being able to see your returns.  If the 2021 amount was $12,000, then the 2022 amount should be $12,000 plus your 2022 non-deductible contributions.   If your 2022 non-deductible contributions were in fact $2,400, then somehow the 2021 number did not carry forward.   (And if $3600 was your 2023 contribution, form 8606 should end up at $18,000.) You may need to file amended 2022 and 2023 returns to make sure the carry-forwards are reported.

Look at your 2022 form 8606.  It's really a fairly simple math problem. Line 1 is current year non-contributions, and line 2 is the total of prior year non-deductible contributions.   In other words, the 2022 form 8606 line 2 should be the same as the 2021 line 14.   

[lchan]

Looking back at my returns, I have several years where the value in Line 2 is $0, therefore the cumulative value is never reported correctly. 

Most recently, in 2022, Line 2 is $0, thus restarting the total. 

How far back can I submit an amendment, because it's several thousand dollars that are being miscalculated?

[Opus 17]

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@lchan wrote:

Looking back at my returns, I have several years where the value in Line 2 is $0, therefore the cumulative value is never reported correctly. 

Most recently, in 2022, Line 2 is $0, thus restarting the total. 

How far back can I submit an amendment, because it's several thousand dollars that are being miscalculated?

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I would go back as far as you can prove.  The IRS will not pay a refund on an amended return more than 3 years old, but I think they will accept your form 8606 since you are just documenting the carry over basis you missed.  

You would need to download the specific form 8606 for each year.  The IRS has prior year forms on their web site.  You also need form 1040-X for each year that you need to amend.  Since you are not changing your deduction (you already did not take the deduction, you just didn't carry over the prior deductions correctly), you will need to copy the specific numbers from your tax returns to the 1040-X, but there's no math involved.  Column A would be what you originally reported, column B (changes) is zero, and column C is the same as column A.  The reason you would write on part II would be to correct form 8606 because you failed to include the prior basis on line 2.

https://www.irs.gov/forms-pubs/about-form-1040x

You will have to go in order, starting as far back as you have records to prove what you did.  If you don't have copies, the IRS is supposed to have your transcripts for either 7 or 10 years. 

https://www.irs.gov/individuals/get-transcript

Start with the first form 8606 you can prove is wrong, then prepare them in order.  Prepare a 1040-x to accompany each form 8606.  Sign everything, and mail to the IRS (separate envelopes for each year).  Then keep the final amended form 8606 from 2023 with your records to use when you make future contributions or withdrawals. 

[lchan]

Thank you so much for the step by step instructions on this. I truly appreciate your help and expertise!!