If an IRA contribution is not deductible due to excess MAGI, what should be done?

[Kavekreeker]

We contributed the $8000 limit to my wife's Simple IRA in 2025.  

Do we need to withdraw or can we just leave it?

If we leave it, how is it treated/identifed upon withdrawal?

My wife is taking RMDs.  

[dmertz · Accepted solution]

Do you mean that your wife made a contribution to an ordinary traditional IRA.  SIMPLE IRAs are not permitted to receive ordinary IRA contributions.

Assuming that you meant that the contribution was made to an ordinary traditional IRA, the options are, report your wife's nondeductible contribution as is, recharacterize your wife's the contribution to be a Roth IRA  contribution if your wife is eligible to contribute to a Roth IRA, or your wife can request an explicit return of contribution from the traditional IRA.  The deadline for recharacterizing or obtaining a return of contribution is the due date of the tax return, including extensions.

If left as is, the contribution will be reported as an addition to basis on Form 8606 and will be applied proportionately to any of her traditional IRA distributions, including RMDs (except for amounts treated as Qualified Charitable Distributions).  With basis in nondeductible traditional IRA contributions, the nontaxable and taxable amounts of traditional IRA distributions will be calculated on Form 8606.

[Kavekreeker]

Its a traditional IRA.  If I recall, TT handles 8606 correct?  

I'm contemplating withdrawing the $8K to avoid the tracking hassle.

[dmertz · Accepted solution]

Yes, paid versions of TurboTax handle Form 8606.

Remember, removing the contribution would mean a return of contribution, not an ordinary distribution.  Taxes would be due on any attributable investment gain required to accompany the returned $8,000 contribution.

[Kavekreeker]

Yep, need to call Schwab to arrange return of contribution.  I'm hoping this will be a 2026 event so I can finish 2025 TT once 1040s are pushed.  Thanks a lot for the help.  I think I'm all set....

[dmertz]

Gains attributable to the returned $8,000 contribution will be reportable on your 2025 tax return.  The 2026 Form 1099-R will have code P in box 7, the IRA/SEP/SIMPLE box marked and any taxable gains in box 2a.

[Kavekreeker]

Hi,

RE: continuing tax drama above

Background

I ran thru TT before the 8606 form was finalized.  My wife's entire 2025 IRA contribution was non-deductible which originated this message.

When the 8606 was released, there no TT prompt to review or error.  TT was ready to send

Which I absentmindedly did.  I'm pretty sure I need to file an amendment.

I initiated TT amend but got stumped when it only asked about re-characterizations to Roth but no option for other investments or cash. 

Question

What should I have done before 'hitting send?'

As for TT amend, how do I move forward?

[dmertz]

"When the 8606 was released, there no TT prompt to review or error."

An ordinary nondeductible traditional IRA contribution is not a excess contribution.  The tax code permits nondeductible contributions.

If the contribution is not returned, there is nothing to amend.  The Form 8606 reports the nondeductible contribution.  If your wife obtains a return of the contribution, amendment will be necessary to correct the From 8606 to show the no nondeductible contribution was made.  The Form 8606 will need to be prepared outside of TurboTax because with the contribution removed, TurboTax will simply remove the Form 8606 rather and preparing it with a zero in box 1.  If the contribution was made in 2025 and the account saw an investment gain while the returned contribution was present, the gains that are required to accompany the returned contribution will be taxable on the 2025 tax return, so the amendment will also need to include that as taxable income.

[Kavekreeker]

I understand I need to file amendment outside of TT and direct to IRS.  

• We had Schwab return the nondeductible traditional IRA contribution and gain early February 2026

How do I report the gain?

• When I asked Schwab, they claimed it would be a 2026 gain
• Do I need to call them and ask for corrected 2025 1099?

Could I just ask them to reinvest the contribution and gain?   

• this sounds much easier and no need for an amendment
• She's getting RMDs so it would tick down to zero in a couple of years
• The gain was 16%

Thanks again for your help!!

[dmertz]

"When I asked Schwab, they claimed it would be a 2026 gain"

It will be reported on a 2026 Form 1099-R, but the year of this income depends on when the contribution was made.  If the contribution was made in 2025, the 2026 Form 1099-R will have code P in box 7 indicating that the gain is to be reported on the 2025 tax return.  If the contribution for 2025 was made in 2026, I would expect the 2026 Form 1099-R to have code 8 indicating that the gain is to be reported on the 2026 tax return.

"Do I need to call them and ask for corrected 2025 1099?"

No.  The distribution occurred in 2026, not in 2025.

"Could I just ask them to reinvest the contribution and gain?"

You can do anything with the cash that you want.  Whatever you do with it does not change the reporting requirements for the return of contribution.  You are not permitted to undo a return of contribution.

[Kavekreeker]

Thank you for rapid reply!

So really all I need to send IRS is a corrected 8606?  

[dmertz]

And Form 1040-X.  If the gains are taxable in 2025 (code P in box 7 of the 2026 Form 1099-R), the Form 1040-X will show the change in taxable income and the balance due.

[Kavekreeker]

"If the gains are taxable in 2025 (code P in box 7 of the 2026 Form 1099-R), the Form 1040-X will show the change in taxable income and the balance due."

I enter the change in taxable income [gain] and the balance due on the 1040x.  But actually pay the balance in my 2026 1040 tax return with Form 1099-R (with code P in box 7), correct?

[dmertz]

"But actually pay the balance in my 2026 1040 tax return with Form 1099-R (with code P in box 7), correct?"

No. the balance is due with your Form 1040-X.