return of non-deductible IRA contribution.

[Cbrooks3]

I am over 59 1/2. Made a 2021 IRA contribution.  Later found out it is not deductible.  However, it is not an excess contribution.  It is my understanding that I can remove the non-deductible contribution before filing my 2021 return (thus avoid my heirs having to deal with basis), but the entire gain must be reported as income on the 2021 return even though the return of contribution is not happening until 2022.  To further complicate things, there actually is a loss - not a gain.  How can I report the removal and the loss in turbotax.  And then of course, I'll get a 1099R next year that I'll have to deal with.  My IRA custodian says I should do the return of contribution as a return of excess; a call to the IRS says that is incorrect because it's not excess.

[JohnB5677]

Yes, you can withdraw the non-deductible contribution before filing your 2021 tax return.

And yes, the entire gain must be reported as income on the 2021 return even though the return of contribution is not happening until 2022. 

To take advantage of the loss you would have to cash out the entire value of the IRA.  Then you would have to Itemize your deductions and post it to Schedule A.

You will get a 1099-R for the 2022 withdrawal; however,  You can prepare a substitute 1099-R, and close the entire process this year.  You would then not post the 1099-R next year.

To file a substituted 1099-R:

1. Wages & Income

2. IRA, 401(k), Pension Plan Withdrawals (1099-R)

3. Did you get a 1099-R in 2021? Yes

4. Get ready to be impressed - Continue

5. Select Change how I enter my form

6. Type it Myself

7. Continue the interview from here.

8. In most cases Box 7 is code 7

9. There will be a question  Do any of these situations apply to you?

10. Select I need to file a substitute 1099-R

11. Continue through the interview

Note: If you’re 70 ½ or older, (not 59 1/2) you can't make a regular contribution to a traditional IRA. 

Edited 02/15/2022

[fanfare]

@Cbrooks3 

the "gain" to be reported is any earnings on the money while it was in your account.

The custodian does the calculation for you.

The amount goes in 4b ; if it is negative enter zero.

If you don't put positive earnings on your 2021 return now, you will have to amend your return later.