Reporting reversal of a non-deductible IRA contribution

[shr22]

I contributed $7000 (that is allowed for my age) to my IRA that turned out to be non-deductible. Turbotax filled out form 8606 for me. Now I like to reverse the contribution but don't know how to report the reversal on my taxes. The $7000 has not been invested, so there is no gain/loss from it. I understand I can request the reversal through my investment advisor.

1 - Is the reversal considered distribution?

2- Do I need to report the reversal on taxes?

3- How do I report the reversal on taxes?

4- Is 8606 still needed when contribution has been reversed?

Thanks in advance for any help.

[JulieS]

Please clarify what you mean by "reverse the contribution". Does that mean you want to take the amount out the account or convert it to a Roth?

Have you filed your 2021 tax return already? are we talking about 2021 contributions?

[shr22]

Hi JulieS,

Thanks for responding. Reversing the contribution means taking the money out of my IRA account ($7000). The contribution is for 2021. I have not filed my taxes yet, waiting to understand whether and how I need to report the contribution reversal.

[DanaB27]

Yes, if you requested the return of your 2021 contribution (usually it plus earnings but you stated you did not have any) with your financial institute you will get Form 1099-R which has to be reported but since you did not have any earnings it will not be taxable.

You will not enter a contribution in the IRA contribution section. Therefore, Form 8606 will not be created.

@shr22

[shr22]

Thank you DanaB27. I want to make sure I understand.

I don't need to file 8606 for 2021 non-deductible contributions if I take the entire $7000 out through my IRA custodian, because it is a wash?

Would I need a 1099-R for 2021 (I was told it is too late to receive one for 2021)? If so, how would I get one?

Would I receive a 1099-R in 2022?

Would the non-deductible contributions and not-taxable distributions be reflected in 1099-R? What should I be looking for?

[FangxiaL]

Here is some information provided with IRS 2021 Instructions for Form 8606 regarding Return of IRA Contributions:

Please refer to page 4 of the 2021 Instructions for Form 8606.

@shr22

[shr22]

Thank you FangxiaL for additional information.

The 8606 instructions is requesting a statement explaining the distribution. How would I attach a statement to my tax return, since I'm filing online with Turbotax?

[DanaB27]

TurboTax will create an explanation statement and you can enter "Return of contribution because it was nondeductible" when you enter your 2022 Form 1099-R. To confirm you requested the return of contribution with your financial institution in 2022, correct?  

@shr22

[shr22]

Thank you DanaB27.

Yes, I'll request the return of contribution in 2022 but it is for 2021 tax year. The contribution was made for 2021. Would Tubotax generate a statement for my 2021 return to report the distribution on form 1040, line 4a (since I won't need to report the contribution on 8606)? I don't have a 1099-R for 2021.

[DanaB27]

If you withdrew a 2021 contribution with no earnings in 2022 before the due date, then you will get a 2022 Form 1099-R in 2023 with code P. This Form 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 2022 1099-R in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in the 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 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 2021?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution minus earnings)
7. Box 2 $0
8. Box 7 enter P
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 2022 1099-R.

[shr22]

Thanks very much DanaB27.

Since I have not filed my 2021 taxes yet and the contribution/distribution occurred in 2022. Wouldn't it be more beneficial (less complicated) to:

- file my 2021 taxes with no reporting of contribution/distribution

- file my 2022 taxes, using the 2022 1099-R, reporting non-taxable distribution

[DanaB27]

If you do not create a Form 1099-R now then  you will have to amend your 2021 tax return when you get the form. You do not enter it on your 2022 tax return unless you had tax withholdings (then you enter it both in 2021 and 2022.)

[shr22]

Thanks for your continued support DanaB27.

What if I don't take the distribution, then have to file 8606 for the contribution, right?

What else do I need to do?

[DanaB27 · Accepted solution]

Yes, if you do not request the return of contribution then you will have to file Form 8606 to report this nondeductible contribution (basis). When you later take distributions/convert funds to Roth, you will need the basis information from line 14 of Form 8606.  I assume you have deductible and nondeductible contributions in the traditional IRA. Therefore, each distribution/conversion will have a taxable and nontaxable part.

@shr22