excess contribution to Traditional IRA in 2019 and 2020

[theresad7]

I recently learned I incorrectly deducted contributions to a Traditional IRA in 2019 and 2020.  I no longer have earned income so my understanding is that I will need to amend those 2 years to pay the additional income tax plus the penalty computed on form 5329.  My question is - how the earnings treated?  For example, for the 2019 contribution, do all the earnings (through date of correction) get included on the 2019 return?  Or will there be earnings for 2019, 2020 and even 2021 related to the 2019 contribution?  Do I have to wait to receive the 1099 from the investment firm to amend?  Thanks.  I am confused about the process as I can't find an example anywhere based on my unusual circumstances.  By the way, even though my income was properly coded as deferred compensation on my W-2 in 2019 and 2020, Turbo Tax incorrectly allowed the deduction.  In 2021, Turbo Tax properly determined that deferred compensation is not earned income.

[DanaB27]

To verify, you had enough taxable compensation (box 1 of your W-2) but since you had a retirement plan at work your income was over the limit to deduct the traditional IRA contribution? Please see deduction limit 2019 (page 13) and deduction limit 2020 (page 13) for details.

If you had enough taxable compensation then you were allowed to make the contribution and do not need to withdraw your contribution. But if you deducted the contribution but weren't allowed to deduct it because you had a retirement plan at work and your income was too high then you will need to amend your 2019 and 2020 tax return. Please see How to amend (change or correct) a return you've already filed. You will verify, if your box 13 on your W-2 entry is checked or answer "Yes" that you had a retirement plan at work when you got through the IRA contribution interview.

1. Click on "Search" on the top right and type “IRA contributions” 
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA"
4. Answer "Yes" you had a retirement plan at work 
5. Continue through the questions and TurboTax will calculate how much you can deduct and create Form 8606 for the nondeductible part (basis)

Please be aware, when you work on your 2020 tax return you will have to enter the 2019 basis from your 2019 Form 8606 line 14 during the IRA contribution interview when TurboTax asks if you made nondeductible contributions in prior years.

If you did not have enough taxable compensation (box 1 on your W-2 is less than what you contributed) then you will have to make a regular withdrawal (without earnings) since it was after the due date. But TurboTax should have given you a waring about an excess contribution during the IRA interview since you entered your W-2. If you had an excess contribution then TurboTax will calculate the penalty on Form 5329. If you did not have enough taxable compensation then please comment back after you verified that TurboTax did not calculate the penalty on Form 5329 for 2019 and 2020.