Withdraw of After tax contribution to traditional ira taxable?

[afrirado]

In early 2021,I did a $6000 after tax contribution to traditional IRA, then withdraw it within 30 days before 4/15/2021.  When I received the 1099R form and import to turbotax, turbotax said $6000 distribution is taxable. 

I thought this is withdraw of after tax contribution should not be tax again. Anyone can help me, thank you. 

[FangxiaL]

Please clarify: do you have any balance in your Traditional IRA account(s) with deductible and non-deductible contributions?

[afrirado]

There's no balance in the traditional IRA account that withdraw money, but I have rollover IRA account which has money. 

turbotax didn't even ask me if I have other IRA account and based on box 7 type and consider the withdraw all taxable. I understand the earning is taxable, but thought the base $6000 is after tax contribution, should not be taxes again. 

[FangxiaL]

When you have multiple IRA accounts, they will all be treated as one account when determining the tax consequences of any distributions (including a distribution out of the account for a Roth conversion).

Because the standard rule for IRA distributions is that any after-tax contributions come out along with any pre-tax assets (whether from contributions or growth) on a pro-rata basis, when all the accounts are aggregated together, it becomes impossible to just withdraw the non-deductible IRA.

Suppose you have a balance in your IRA account of $206,000 (including the non-deductible $6,000 contribution in 2020), the return-of-after-tax portion will be only $6,000/$206,000 = 2.91%. Most of the distribution will be taxable.

[afrirado]

Thank you for your explanation, even This contribution happen before tax filing deadline? 

So if I do a after tax $6000 contribution to traditional IRA and then convert to roth IRA, the same pro-rata rule will apply, right? But turborax didn't consider that $6000 conversion taxable.  This confuse me a little bit. 

[FangxiaL]

Yes, the pro-rata rule applies to Roth IRA conversion as well. 

[fanfare]

@afrirado 

You can generally make a tax-free withdrawal of contributions
if you do it before the due date for filing your tax
return for the year in which you made them.

Hint: You have to tell TurboTax this is what you did in the followup interview.

[afrirado]

@FangxiaL @fanfare 

Thank you both.

Where should I enter IRA total amount So turbotax will calculate pro rata rule, right now it doesn't calculate.

By the way, the IRA total do not include company 401k, right?

[FangxiaL]

Here is what you can do regarding the contribution and distribution of the $6,000 you made in early 2021:

• If, in 2021, you made traditional IRA contributions or Roth IRA contributions for 2021 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2021 tax return, the returned contributions are treated as if they were never contributed. Don't report the contribution of distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution with related earnings, you are generally subject to the additional 10% tax on early distributions.
•  If you made a contribution for 2020 and you had it returned to you in 2021 as described in the paragraph above, do NOT report the distribution on your 2021 tax return. Instead, report it on your 2020 original return (if not filed yet) or amended return in the manner described in the paragraph above. 

For future planning purposes, if you want to contribute to Roth IRA and your income level disallows it and want to consider Backdoor Roth conversion, make sure all the deductible IRA contributions are out of your IRA accounts. One way to achieve this is to roll over to your 401(k) plan if the plan allows.  

IRA total does NOT include money in company 401(k). 

Here is a link to IRS instructions for Form8606 on Return of IRA Contributions.

@afrirado

[afrirado]

@FangxiaL 

Really appreciate your detailed help. I wish I have know this last year, I have to pay tax on the roth conversion because of IRA account balance. I wish I have talked to you last year to avoid the double tax. 

[fanfare]

@afrirado 

At first you said you took it out, but you didn't say you moved it into a Roth IRA. (that makes it a conversion).

did you actually take the money out ? or did you have the custodian move it from one account to the other?

For a conversion, you need a Form 8606 to show your original contribution should be non-deductible.

The year of the form depends on for what tax year you put in that $6,000.

[afrirado]

@fanfare 

It's a sad story 😂

My wife and I both made a $6000 after tax contribution to IRA, then I convert it to roth IRA, but someone told me I will have to pay tax on the conversion because I have IRA balance, and conversion is not reverseable. 

Then to avoid this double tax, my wife withdraw her after tax contribution to IRA. So our family have the two scenario, She does not need to pay tax again but I will have to.