IRA deduction

Forum|Forum|5 years ago
February 8, 2021
3 replies
30 views

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?

Best answer by HelenC12

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?

HelenC12Answer

Level 15

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

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dmertz

Level 15

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.

philiprootsAuthor

Level 2

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

Level 15

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).

silasnic43

Level 2

My wife & I are both over 50, opened a $7000 IRA for 2020 tax year If I contribute to that IRA can my wife also open an IRA that would be deductible?

PattiF

Level 15

Yes, your wife would be able to contribute to an IRA for 2021 as long as you had jointly earned income equal to or greater than $14,00.

@silasnic43

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tovaface

Level 4

The Live Support "tax expert" I spoke with yesterday told me IRA contribution amount is based on MAGI. Yet nowhere in TT could we find MAGI on my 2021 Home and Business Desktop version. This CPA "expert" did not seem to be at all familiar with TT software. Why is there is no search bar in TT? The Topic List under tools was no help at all. He told me that based on my AGI, I should contribute the maximum. When I told him I didn't think that was correct, he said I can call the brokerage which holds my IRA account and they could tell me. I finally found a number for Combined Earned Income in the Personal section under Retirements and Investments. Yet I could not tell on what that number was based. It didn't match any number from our Schedule Cs or any other form. It was far less than the maximum amount this advisor said I could contribute. Lastly, every time I reopen TT, it automatically updates and many of my number change, e.g. Adjustments, AGI, Taxable Income, and Combined Earned Income. If my IRA contribution is based on the latter, how do I know it's correct if it changes with every update? I'd like to know how TT is calculating this number.

Thank you.