IRA deduction

[philiproots]

I am over 50 and made a $7000 traditional IRA contribution for 2020 in January of this year.  TurboTax determined that my maximum IRA deduction for 2020 is $4720 - can I use the excess $2280 (i.e., $7000 - $4720) as a partial IRA contribution in my 2021 tax return?

[HelenC12 · Accepted solution]

Yes, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year. For additional information, see IRS Publication 590-A,  page 36. 

To enter your IRA contribution: Where do I enter my Traditional or Roth IRA?

[dmertz · Accepted solution]

The $2,280 is not an excess contribution subject to penalty that can be treated as part of your 2021 IRA contribution.  It's simply a nondeductible traditional IRA contribution that must be reported on Form 8606.

If you are filing Single, you could recharacterize The $2,280 to be a Roth IRA contribution instead.  If you file with any other filing status, you may or may not be able to recharacterize this contribution since your MAGI for the purpose of being eligible to make a Roth IRA contribution might be above the limit for your filing status.

To be able to use the $2,280 as part of your 2021 contribution, you would have to obtain an explicit return of contribution of the $2,280, with the amount distributed required to be adjusted for any investment gain or loss while in the traditional IRA.  Any gain required to be included in this distribution is then subject to income tax and, if you are under age 59½ at the time of this distribution, to a 10% early-distribution penalty.  You could then use this returned money to fund your 2021 contribution.

[philiproots]

Thank you dmertz for clearly explaining my options.  I am filing jointly with my wife and am over 59 1/2 - it sounds like a lot of effort to back out that $2280 for this year's tax return, if even possible, so I am just going to chalk this up to another lesson learned - in future I will run the numbers through TurboTax before making my IRA contribution.

[dmertz]

If your traditional IRA deduction is being limited because you are covered by a workplace retirement plan (regardless of whether or not your wife is covered by a workplace retirement plan), the MAGI limit where you would become ineligible to make a Roth IRA contribution is well above your MAGI, so recharacterization of the $2,280 to be a Roth IRA contribution instead is a possibility and probably would be beneficial.  Any gains that the $2,280 has already produced and any future gains instead of being tax deferred would be tax free once the requirements for qualified Roth IRA distributions has been met.  Your IRA custodian will have a special form for requesting a recharacterization (different from a Roth conversion which is not what I'm describing).

[philiproots]

Yes...TurboTax determined that $4720 of the $7000 contribution was the maximum deduction I could take because I am covered by a 401K workplace retirement plan.  I will ask my IRA point of contact at the BB&T to arrange the recharacterization as you suggest - it does sound a lot easier than the previous scenario.

[dmertz]

If you request a recharacterization of $2,280, the custodian will calculate the investment gain attributable to that amount and include the gain in the amount transferred to the Roth IRA.

Before requesting a recharacterization, make the entries into TurboTax to allow TurboTax to confirm that you are eligible to make the resulting Roth IRA contribution (although I can't imagine a scenario where you would not be eligible to make this Roth IRA contribution).  You do this by revisiting your traditional IRA contribution entry and on the page after the one where indicating that you made a $7,000 traditional IRA contribution you indicate that you "changed your mind" and then indicate that you recharacterized $2,280.  TurboTax will then prompt you to provide an explanation statement where you'll show the dates, the amount recharacterized and the gain-adjusted amount transferred.

Since you are dealing with a bank, make sure that they do a recharacterization and not a Roth conversion.  In general, many bank reps are clueless about the difference and occasionally perform the wrong type of transaction.  A mistaken Roth conversion, while a permissible transaction, is not as beneficial and cannot be reversed.

[philiproots]

I will the scenario through TurboTax first and if it looks eligible, will ask my IRA custodian to recharacterize the $2280 and make sure he understands the nature of the transaction.  Thank you for all you expert advice!

[hkc]

I am retired, single and so not covered by any employer 401K program.  I did some work for my Home Owner Association, and earned $720 for the year, reported to IRA by the HOA management company via a 1099-NEC form.  I contributed the entire amount $720 to a traditional IRA, as I am doing ROTH conversion and my MAGA is higher than what's allowable with ROTH contribution.  Turbotax determined that only $669 is deductible, and that $51 is excess contribution that I would need to withdraw.

I have 3 questions:

1.  Why can't I deduct the full amount $720?

2.  Why is $51 considered to be excess contribution that I would need to withdraw vs being considered only as non-deductible?

3.  Does Turbotax offer some individual tax review service to look over my return before I file and answer any question I might have?

Thank you very much

HKC

[MaryK4]

Because it is self-employment income, TurboTax calculated the self- employment tax. Your taxable compensation for the year is reduced by $51, which is one half of the self employment income on $720.   This is an adjustment to income so it reduces your taxable compensation.

Yes, TurboTax offers you the opportunity to go over your tax return with a licensed professional.  Go to How do I schedule my review using TurboTax Live?

[hkc]

Thanks!  If I am using TurboTax CD, is there any other option to get help with Tax review?

hkc

[macuser_22]

What more do you need to know?  The $51 is an excess contribution and you need to ask the IRA custodian for a return of contribution  before the due date (April 15) to avoid penalties.   Be sure to ask for a "return of contribution plus earnings".

[hkc]

Thanks very much for your help.  I am working with my custodian to see which is the best way to approach this.  

hkc

[tovaface]

@philiproots TurboTax should have told you how much of an IRA contribution you are allowed to make. I have a similar issue. 

I was able to connect with a live support person today without too much of a wait. That was the best part of the call. I thought I had a fairly straight forward question - in previous years TT told me how much I could contribute to IRAs based on our income. This year it didn't; only stated what the maximum limits are. The support person on the phone said I'd have to speak to a CPA. I had to ask her for the Support ID # before she transferred me. 

When I was connected to the CPA, the CPA said she didn't get a case number or any information about my account. Worse, she didn't have a clue how to answer my question. She said she thinks the contribution limit is based on the modified Adjusted Gross Income from 1040 line 11. She suggested I use the IRA contribution worksheet and figure it out for myself. This is not the kind of support I expect from a TT CPA. @macuser_22 

[macuser_22]

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@tovaface wrote:

@philiproots TurboTax should have told you how much of an IRA contribution you are allowed to make. I have a similar issue. 

I was able to connect with a live support person today without too much of a wait. That was the best part of the call. I thought I had a fairly straight forward question - in previous years TT told me how much I could contribute to IRAs based on our income. This year it didn't; only stated what the maximum limits are. The support person on the phone said I'd have to speak to a CPA. I had to ask her for the Support ID # before she transferred me. 

When I was connected to the CPA, the CPA said she didn't get a case number or any information about my account. Worse, she didn't have a clue how to answer my question. She said she thinks the contribution limit is based on the modified Adjusted Gross Income from 1040 line 11. She suggested I use the IRA contribution worksheet and figure it out for myself. This is not the kind of support I expect from a TT CPA. @macuser_22 

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The "Other Tax Situations", IRA Calculator Tool, will tell you how much you can contribute, however there is currently a bug if you are older then 70 1/2.

The IRA contribution interview will tell you if your contribution is too much at the end of the interview, then  you can remove or change it.