Traditional IRA with basis … Need help with prior years’ excess contributions where a larger normal IRA distribution was received, followed two years later by corrective distributions, all after the extended filing due dates of the contribution years

[BME]

This is the next phase of my excessive IRA contributions saga.  I have prepared and filed amended 2021 and 2022 returns with Forms 5329, reporting excessive contributions in each year to my traditional IRA with basis.  https://ttlc.intuit.com/community/retirement/discussion/how-do-i-handle-traditional-ira-basis-form-8...

I am now dealing with 2023.  I am in the process of amending our 2023 return to correct an unrelated error and, I thought, to report and pay the 6% penalty on excessive traditional IRA contributions that carried over to 2023 from the two prior taxable years (2021 and 2022).  In 2025 (earlier this year), I requested and received corrective distributions of the excess contributions.  

When I requested the distributions, I had not considered that, for 2023, I took a normal IRA distribution that was greater than, about double, the combined excessive contribution carryforward.  The 1099-R, as usual, has Box 1 gross dist & Box 2a taxable amounts the same (the total distribution amount in both boxes), the Taxable Amt Not Determined box is checked, Code 7 on line 7, and IRA/SEP/SIMPLE checked.       

Now, I am not sure how to proceed with TT in amending my 2023 return.  I would appreciate insight and help.  Here’s where I am:

OPTION A (?).  (Note:  I prefer this option, to bring this mess to conclusion earlier rather than later, and hope that it is an acceptable and doable approach.) 

On the 2023 amended return, can I consider and report the 2023 normal distribution as clearing the excessive contributions, such that I will not need a 2023 Form 5329 & penalty payment?  

I think that OPTION A MAY require that I make certain adjustments in TT to my “as received” 1099-R info – particularly the line 2a taxable amount, manual addition of various codes, possibly an adjustment of my IRA basis, I even wondered about entering two 1099-R's for the distribution, one with the return of contribution and the remainder as normal – but I am not confident how to do that correctly in TT.  

I do need to understand how my distribution is being taxed, pro-ration and all, so I can feel confident that I am reporting it correctly on my amended return.

Maybe OPTION A is my only option, i.e., that this clearing of the excessive contributions happens and must happen when a normal distribution is taken on my facts, I don’t know.  If this is the option taken, then I also need insight into what to do when my 1099-Rs for the corrective distributions I requested and received in 2025 are reported, as those distributions would then be properly treated, and I guess I would need to manually re-code them, as normal distributions since all excessive contributions would have been cleared on my amended 2023 return under this scenario.

OPTION B (?).  Report the normal distribution exactly per the 1099-R as received, consider the prior year excessive contributions as remaining in the IRA for 2023, making sure that I answer TT’s questions correctly to achieve such treatment.  This, if an option, I imagine would result in another penalty for 2023 with another Form 5329, ditto for 2024, as the corrective distributions weren’t made until 2025.  

If OPTION B is the approach, I think I know how to handle the 2025 1099-R’s.  The corrective distributions I received in 2025 were just contribution amounts, with no earnings calculated thereon.  I expect they’ll be entered as received.  

Any insights and instructions would be greatly appreciated!

[dmertz · Accepted solution]

"On the 2023 amended return, can I consider and report the 2023 normal distribution as clearing the excessive contributions, such that I will not need a 2023 Form 5329 & penalty payment?"

Yes.

Your distribution in 2023 actually included a distribution of the excess contributions made for 2021 and 2022, so no excess carried over to 2024.

The distribution that you received in 2025 is therefor unrelated to any excess contribution.  If still within the 60 rollover window you could roll that distribution back into an IRA.

Since no calculation of net attributable income on the 2022 excess contribution was done, you'll need to treat the 2023 distribution as correcting the 2022 excess contribution after the due date of the 2022 tax return even though you might have made the distribution before the due date of the 2022 tax return, including extensions.

To accommodate 2023 TurboTax, you'll need to split the 2023 Form 1099-R into two, one reporting a distribution of the combined excess (with no adjustment for investment gains or losses)  and the other for the remainder of the distribution.  When entering the one for the combined excess, enter a zero in box 2a instead of entering the same amount as is in box 1.  This is a special indication to TurboTax that the distribution represents a distribution of excess contribution after the due date of the corresponding tax return so that as you proceed after clicking the Continue button on the page that lists the Forms 1099-R that you have entered, TurboTax will eventually prompt you to prepare the required statement to explain this as a return of the excess contributions.  The Form 1099-R for the remainder of the distribution will have the same amount in box 2a as is in box 1.  Any tax withholding form this distribution can be split between these two 1099-R forms any way that you wish.  2023 TurboTax will exclude from Form 1040 line 4b the entire combined amount of the excess.

Assuming that you have already begun your 2024 tax return with 2024 TurboTax, you'll simply need to zero out the amount of excess originally carried over from the 2023 tax file.

Note that if your 2021 and 2022 tax returns included Form 8606 to add your excess contributions to basis in nondeductible traditional IRA contributions, unless the TurboTax program has changed from when I last checked, TurboTax fails to later reduce the amount of basis by the the amount of excess contribution distributed after the due date.  This means that you'll likely need to adjust the basis yourself, probably in 2024 TurboTax by subtracting the amount of the excess contributions distributed.

[BME]

@dmertz thank you so much!  I will work on entry of a manually created bifurcated 2023 1099-R ... will come back if I hit any snags or get stuck.  

[BME]

@dmertz, Huzzah, it all seems to work!  The Form 8606 make sense.  The nontaxable %, TT's calculation of the taxable amount (which I can see and confirm step-by-step on Form 8606), the 2023 ending IRA basis (unchanged in my case, as I did not increase it in the prior year amended returns for the "to-be-cleared eventually" nondeductible excessive contributions), the fact that my excessive contributions are, in fact, cleared by TT in the 2023 amended return, and, ultimately, that TT, accordingly , does not generate a 2023 Form 5329 (whew), everything makes sense. 

Would you kindly take a look at my manual 1099-R box & code entries?  Even though it all seems to work calc-wise, and I found the Form 1099-R Instructions to be instructive, I want to feel confident that this is, in your experience, an appropriate way to fill in the form in my situation.   (Any corrections or suggestions are appreciated, as I haven't filed yet.)     

Assume the official 2023 1099-R reports a $19,000 normal traditional IRA distribution.  I split it into two 1099-Rs, manually entered in TT:

1) 1099-R Part 1 of 2 (for the $9k of prior year excessive contributions that carried over into 2023, and were cleared in and for 2023 as $9k of the 2023 normal distribution); and

2) 1099-R Part 2 of 2 (for a normal distribution of the $10k balance).    Amounts are round examples:

	1099-R Line		1099-R Part 1 of 2		1099-R Part 2 of 2
	Ln 1 Gross distribution		9,000		10,000
	Ln 2a Taxable amount		LEAVE BLANK		10,000
	Ln 2b Taxable amount not det'd		CHECKED		CHECKED
	Ln 4 Fed tax w/held		LEAVE BLANK		5,000
	Ln 7 Box 1		CODE 7		CODE 7
	Ln 7 Box 2		LEAVE BLANK		LEAVE BLANK
	IRA/SEP/SIMPLE		CHECKED		CHECKED

Thank you for all your help!

[dmertz]

1099-R Part 1 must have a zero in  box 2a (not blank).

[BME]

@dmertz thank you!  Made the change.  It didn't alter the tax effect in TT and I think the affirmative "0.00" there reinforces that I am reporting a tax-free removal of my excess contributions.