Removing Post-Tax Traditional IRA Contribution as Taxable Income when doing an Excess Contribution Removal

[s_chi29]

Hello,

I funded a Traditional IRA in late 2024 with a financial institution in the amount of $7000, but soon withdrew it as an excess contribution as I decided to leave said financial institution.  This $7000 contribution was made with post-tax dollars and was never deducted from income.

By time I made the withdrawal, I lost about $6, so the distribution was for $6994.  On my 1099-R, the $6,994 is showing as taxable.  However, it SHOULD NOT BE as this was funded with after-tax funds and was never deductible.

TurboTax of course kept adding this $6994 to my income, which is not correct.  I see of no way to remedy this besides changing Box 2a Taxable Amount of the 1099-R to $0.

Is this the right way to handle this?  

I subsequently funded a Traditional IRA after all of this was completed at another financial firm, and did a same-day Roth Conversion of those funds.  This is all correct in TurboTax, but the original withdrawal as excess contribution with the "old" financial firm has no way I can see to change the Taxable Amount to $0.  

[DavidD66 · Accepted solution]

Did you enter your IRA contribution that you removed as an excess contribution?  If you didn't report a non-deductible contribution the program won't know that you had any basis in your IRA.  If you didn't report the contribution, you need to do so.  Once you report a non-deductible contribution of $7,000, your withdrawal of excess contribution should no longer be showing as taxable.  

[s_chi29]

This actually did not resolve the issue.  Here is what I did.  Note all of these transactions were done with AFTER-TAX dollars and at no point was any of this going to be deductible.  These are all non-deductible transactions as my MGI is too high:

Nov 2024:  Funded Traditional IRA with $7,000 at Bank A.

Nov 2024:  Removed above as excess contribution ($6,994, as the account lost some value) from Bank A, as I am going to move to a new financial institution.  Transferred these funds to Bank B.

Dec 2024:  Funded Traditional IRA with $7,000 at Bank B.

Dec 2024:  Immediately converted the Traditional IRA at Bank B to Roth IRA at Bank B.

The 1099-R from Bank A is showing the $6,994 as a Taxable Amount in Box 2a.  There is simply no way to get this excluded out of my taxable income that I can see - I've done everything that I can do.  The only way to exclude that $6,994 is to replace Box 2a on the 1099-R with $0.

[s_chi29 · Accepted solution]

It seems the best thing to do is simply delete the 1099-R I received from Bank A.  That of course removes the taxable income that I cannot seem to get TurboTax to handle properly, and this funding/withdrawal as excess contribution was a completely non-taxable event.  However, I am concerned that this 1099-R from Bank A is furnished to the IRS.  I of course have the paperwork of what I did at Bank A in case it is needed.

In the end, I have a $0 basis in my Traditional IRAs on 12/31/24, and I have a $7,000 Non-Deductible IRA Contribution on Form 8606 made in 2024.

[DanaB27]

To clarify what is the code in box 7? Did you request a return of contributions plus earnings or just withdrew the funds? 

For the Form 1099-R to be coded correctly you should have requested the return of contribution. If this was return of excess contribution with a loss then the Form 1099-R should have code 8 and 1 and box 2a should be $0.

[s_chi29]

Yes, I requested a return of excess contribution.  The 1099-R says "Removal of Excess 2024 Contributions".

Box 7 has '18'.  It is not "81' as you suggest but I am not sure if the order makes a difference?

Box 2a is NOT $0, which I believe it SHOULD be.  It shows $6994.74.

[DanaB27]

The order in box 7 doesn't make a difference.

You will have to contact your financial institution to correct box 2a. Box 2a should only have the earnings listed but you had no earnings. Listing the distribution amount in box 2a is wrong.

Form 1099-R instructions state: "For a distribution of contributions plus earnings from an IRA before the due date of the return under section 408(d)(4), report the gross distribution in box 1, only the earnings in box 2a, and enter Code 8 or P, whichever is applicable, in box 7. Also, enter Code 1 or 4, if applicable."