How do I handle2023 Excess Traditional Nondeductible IRA Contribution all contributions done in 2024?

[denisewoerner-ya]

My husband made excess contribution of $7,500 to his Traditional IRA on February 2, 2024, to be applied to our 2023 tax return. We were over the AGI limit.  I just caught this on February 21, 2024, in prep for 2023 taxes. When preparing our return in TurboTax created a Traditional Nondeductible IRA FORM 8606 telling us that he was eligible.  He has successfully requested the excess and gains from JP Morgan Chase in 2024.  How do I handle this in TurboTax?  Do I say "yes" He made a Nondeductible IRA excess contribution or "no" because I have pulled it back before I filed? Do need to report on the 2023 return or can this be reported on the 2024 return with the 1099-R?  Also, if have to report in 2023 how do I handle the gain for the excess? The $7,500 contribution was all made in 2024. I was told I will not get a 1099-R till next year because the distribution for pulling back our excess $7,500. + Gains happened in 2024.  Thank you.

[DanaB27]

No, you do not have an excess contribution since you requested a return of excess contribution plus earnings. You don't have to enter the traditional IRA contribution, you can delete the entry with these steps:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Deselect the IRA and click "continue"
5. Confirm that you want to delete the entry.

Yes, since you requested the withdrawal of an excess traditional IRA contribution made in 2024 for 2023 plus earnings in 2024 before the due date,  you will get a 2024 Form 1099-R in 2025 with codes 8 and 1. This Form 1099-R will have to be included on your 2024 tax return. Only the earnings in box 2a will be taxable. 

To confirm did you get the waring that you had an excess contribution and the screen showing a penalty or did you just get the warning that because of your modified adjusted gross income (MAGI) you cannot deduct the IRA contribution.

Screen for excess contribution:

Screen when you can make a traditional IRA contribution but you cannot deduct it because you have have a retirement plan at work and your MAGI is to high (TurboTax will fill out Form 8606):

If you got the second screen then you did not have an excess contribution. You just cannot deduct the contribution and will have a basis showing on Form 8606. See What is IRS Form 8606: Nondeductible IRAs for additional information.

[denisewoerner-ya]

To clarify your question in your reply about the screen that I got while completing my return in TurboTax I did received the second one. 

 Yes I Received this Screen "When you can make a traditional IRA contribution but you cannot deduct it because you have have a retirement plan at work and your MAGI is to high (TurboTax will fill out Form 8606):"

We did not want to leave the funds in the IRA as Nondeductible because it causes you to have track the funds on Form 8606 so we requested the funds to be removed from the Traditional IRA as a distributions, J.P. Morgan called this an excess distribution request.

So do I have to report it as the Nondeductible IRA on Form 8606 my 2023 Tax return or can I delete the entry the same way  you suggested I would for an excess IRA?  Then when I get the 2024 1099-R in 2025   I will have to add it to my 2024 return.

Please let me know If I am understand your message  correctly?

Thanks, D

[dmertz]

There is no modified AGI limit for being eligible to make a traditional IRA contribution, only a modified AGI limit for being eligible to deduct the contribution.

Because there was no excess contribution, TurboTax will not provide an opportunity to enter how much contribution was returned.  Instead, since the entire $7,500 contribution was returned (with the amount distributed being adjusted for investment gain) you'll simply have to omit the $7,500 contribution from TurboTax by indicating that nothing was contributed to a Traditional IRA for 2023.  2025 Form 1099-R that he'll be receiving next year will still need to be entered into TurboTax to report the gains as taxable income.

[suttonm11]

Hello.  I am in the exact same situation as the original post.  i.e. we made contributions that we have now discovered are not tax-deductible into a tax deferred IRA for my wife and will withdraw them this month (March 2024).

One point I'm not clear about....

I read on a Fidelity web page (see FAQs at the bottom of the page https://www.fidelity.com/retirement-ira/excess-ira-contributions ), that  "the SECURE 2.0 Act of 2022 removed the 10% early withdrawal penalty on earnings removed with excess and non-deductible contributions for IRA owners under 59.5. However, earnings must be included in income in the year the excess or non-deductible contribution was deposited into your IRA.

I understand this to mean that earnings from the removed contributions must be included in our income for the 2023 tax year, as that was when "the non-deductible contribution was deposited into our IRA"

So do I need to include the gain as income for my 2023 tax return - and if so, please explain how to do that in TurboTax desktop edition?,

or am I misunderstanding something?

thank you !

Mark

[dmertz]

"I understand this to mean that earnings from the removed contributions must be included in our income for the 2023 tax year,"

Correct.  The IRA custodian will issue a code-P 2024 Form 1099-R with the IRA/SEP/SIMPLE box marked that will show the total amount distributed (the amount of contribution returned plus the attributable earnings) and only the attributable earnings in box 2a as taxable.  You can report this on your 2023 tax return by entering this Form 1099-R into 2023 TurboTax as if you have already received the form, then in the questions that follow indicate that it is a 2024 Form 1099-R to that TurboTax knows that this form actually means taxable in 2023 and not taxable in 2022 as initially assumed.

[suttonm11]

Thanks for the explanation.  It sounds a little bit confusing but I think I'll probably understand better once I receive the forms from the custodian .

You wrote that a code P 2024 form 1099-R will be issued. 

The custodian told me I won't get that until early 2025 but I noted you said to enter it now into my 2023 return "as if you have already received the form" ? 

So if I understand correctly, I should enter the relevant amounts into the 1099-R income section in TurboTax even though I have not received the 1099-R yet?.  I guess it would look something like the screenshot attached?

Have I understood your explanation correctly and selected the correct drop down (option 8  ) for box 7? 

I'm still a bit confused, as this is different to what the original person was advised, which seemed to be to wait until 2024 tax season and report the 1099-R (received early 2025) as 2024 income? 

I'm now not sure if it should be reported as income in 2023 or 2024?

thanks again

[dmertz]

Unlike to original poster, it appears that you have said that your contribution for 2023 was made in 2023.  If the contribution for 2023 was actually made in 2024 as was the case with the original poster, the IRA custodian will probably report the return of contribution on a code-8 2024 Form 1099-R which would mean that attributable net income would be reportable on your 2024 tax return.

With no tax withholding, the details of what you enter will not be included with your e-filed or mailed tax return.  Instead, the taxable amount from box 2a will just be included on Form 1040 line 4b.

[suttonm11]

Thanks for explaining the difference - yes indeed I confirm that our 2023 contributions were made during 2023.

One final question - could you kindly confirm that I selected the right options on the screenshot I attached to my previous post?

thank you

[dmertz]

The 2024 Form 1099-R will have code P, not code 8.  Since there is no tax withholding, the result would be the same if you enter a 2023 Form 1099-R with code 8, but entering it as a 2024 Form 1099-R with code P would be more accurate for recordkeeping.  When entering a code-P Form 1099-R into 2023 TurboTax, TurboTax will ask if its a 2023 form or a 2024 form, so you need to answer that it's a 2024 form.

[suttonm11]

perfect, thank you !

[rajuwadekar]

I am in a similar situation as the original poster denisewoerner..  However I have returned the contribution before the deadline. Do I still have to file Form 5329 and withhold 6 percent on line 17 of the Form 5329?

[rajuwadekar]

I have a non-deductible portion and excess of limit portion , both were returned timely and together as excess contribution for 2023 in 2024. Should I just do the 1099-R myself ?

[rajuwadekar]

I believe I do have zero earnings.. in my case.

[DanaB27]

No, you do not have to pay the 6% penalty since you requested to withdraw the excess contribution plus earnings before the due date. You do not need to enter the IRA contribution in the IRA contribution section.

If you withdrew a excess traditional IRA contribution made in 2023 for 2023 plus earnings in 2024 before the due date, then you will get a 2024 Form 1099-R in 2025 with codes P and 1. This Form 1099-R will have to be included on your 2023 tax return and you have two options:  

• You can wait until you receive the 2024 Form 1099-R in 2025 and amend your 2023 return or
• You can report it now in your 2023 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 2024 Form 1099-R into the 2024 tax return since the withholding is reported in the year that the tax was withheld. The 2024 code P will not do anything to the 2024 tax return income but the withholding will be applied to 2024.

To create a Form 1099-R in your 2023 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 2023?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2 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 2024 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 2022" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2023.