How do I report a $6,500 non-deductible contribution to a Traditional IRA (made on Sep 30, 2024), if Fidelity coded it as a 'premature distribution' on Form 1099-R?

[Alex3]

I made a $6,500 contribution to my Fidelity Traditional IRA on September 30, 2024, using after-tax money from my Chase checking account. This contribution is non-deductible. I later decided to withdraw the $6,500 principal without withdrawing the $48 in earnings that accrued in the account. Fidelity informed me that they could only code the withdrawal as a 'premature distribution' on the Form 1099-R, even though this is a return of my non-deductible contribution (basis). I want to ensure this withdrawal is correctly reported to avoid being taxed again on the $6,500. I plan to use Form 8606 to declare the contribution as non-deductible and confirm the withdrawal is not taxable. Can you help me report this properly?

[dmertz · Accepted solution]

The Form 1099-R that will be provided by Fidelity is correct.  Unless made as an explicit "return of contribution" where investment gains attributable to the contribution are also distributed, the distribution constitutes a regular distribution.  A regular distribution made before age 59½ is an early distribution that is subject to penalty.

When you have basis in nondeductible traditional IRA contributions, a regular distribution is subject to a pro rata calculation of taxable and nontaxable amounts on Form 8606.  If the entire account value on September 30, 2024 was $6,548, a regular distribution of $6,500 would be $6,452.35 nontaxable and $47.65, taxable.  With rounding, this works out to 6,452 nontaxable and $48 taxable, leaving $48 of basis in nondeductible traditional IRA contributions.  Only the $48 taxable portion of the distribution is subject to the 10% early-distribution penalty.  If you have other funds in traditional IRAs, your entire balance in traditional IRAs is taken into account in determining the nontaxable and taxable amounts, likely resulting in a much smaller nontaxable amount.

You could possibly treat the distribution as a return of contribution consisting of $6,452.35 of your original $6,500 contribution accompanied by $47.65 of earnings by filing a substitute Form 1099-R that will show $6,500.00 in box 1, $47.65 in box 2a, code 8 in box 7 and the IRA/SEP/SIMPLE box marked.  This would require explanation to the IRS.  The $47.65 (rounding to $48) will be taxable but not subject to an early-distribution penalty.  You'll have $48 of basis in nondeductible traditional IRA contributions remaining in your traditional IRAs.