topic Re: Excess IRA contribution 2018 in Retirement tax questions

Excess IRA contribution 2018

hdurina84 — Mon, 03 May 2021 15:23:27 GMT

I discovered this week that for my wife's traditional IRA @ Vanguard , I made an excess 5500$ contribution for the year 2018. (non-deductible)

Since 2017, due to income limits and work 401ks, all of our IRA contributions were non-deductible.

I spoke with Vanguard .
They confirmed that I do not have to remove the earnings on the excess contribution.

They confirmed that 6% penalty applies on the contribution each year for 2018/2019/2020.

The confusing part is : They also say that the contribution (5550$) will need to be included in my regular income, when its removed and will be taxed at my tax rate plus an 10% early withdrawal penalty. This was a nondeductible contribution which has already been taxed. So, not sure if it should be taxed again and if an early withdrawal penalty should apply as I am just correcting an excess contribution.

Re: Excess IRA contribution 2018

macuser_22 — Mon, 03 May 2021 15:32:21 GMT

If you had at least $5,500 of earned income then a non-deductible Traditional IRA contribution is not "excess". Why do you think it is? Why do you think you have to remove it?

Did you deduct it in 2018 as a deductible contribution?

Did you report is a non-deductible on a 8606 form that was part of your 2018 tax return?

Re: Excess IRA contribution 2018

hdurina84 — Mon, 03 May 2021 15:50:28 GMT

I made 5550$ contribution at fidelity and transferred it to vanguard in 2018.

In early 2019, i forgot about this transfer and contributed another 5550$ to vanguard Traditional IRA-- hence it is an excess 5500 contribution.

I did not deduct any IRA contributions since 2016 due to high income. I have been reporting these non-deductible IRA contributions on form 8606.

Re: Excess IRA contribution 2018

macuser_22 — Mon, 03 May 2021 16:13:54 GMT

If both contribution were for 2018 then indeed you have a 2018 excess that is subject to a 6% penalty that repeats every year until the excess is removed. Therefore, you will have a $330 2018, 2019 and 2020 penalty. If not removed prior to Dec 31, 2021 you will have another 2021 penalty. You remove it with a normal distribution.

You will need to amend 2018, 2019 (and 2020 of already filed) to include a 5329 form that shows the excess and penalty in part III that will go on the 1040 form schedule 2.

Re: Excess IRA contribution 2018

hdurina84 — Mon, 03 May 2021 16:20:50 GMT

Thanks

I will pay the 6% penalty for 2018/2019/2020.

Do I also have to pay income tax and 10% early withdrawal tax on the removed 5500$?