IRA Distribution and Contribution in the same year

[FTERoo]

I am a regular, long term user of Quicken and Turbotax, and an accountant by profession, though not a Tax Accountant.

For several years, my wife has contributed $6,000 via regular deposits throughout the year to a traditional IRA. No Roth contributions, no re-characterizations, just a straight forward contribution, with the attendant deduction on a MFJ return. No excess, no 8606.

In 2019, a distribution was taken, with 10% taxes withheld, all properly reflected on her 1099-R. In 2019 the regular deposits totaling $6,000 also continued. As a result, I have answered "YES" to the question, "Is This a Repayment of a Retirement Distribution?" and "NO" to the Military Reservist question. Distribution and Deposits are same year to the same IRA account.

The IRA section "Interview" does not ask for the 2019 ending balance, just the contribution amount. Further research leads me to think that Turbotax should "probably" have the 2019 ending IRA value. This value is contributions AND earnings, with no segmentation between the two. Where BASIS is requested from 2018 on the Taxable IRA Distribution Worksheet, no value is entered, because without prior to 2019 excess or non-deductible amounts, BASIS on this form is 0. The 2019 ending IRA value I supplied for line 4 of this same worksheet is the first time Turbotax has had that information.

This year, MFS appears to be the best filing approach. Because of the $10,000 income limitation, the $6,000 contribution is not deductible. This then creates a 8606, but also calculates taxability on the distribution (expected) that impacts the $6k contribution (unexpected), generating a basis against the $6k contribution amount for 2019 on the 8606. Is this correct?

As others have noted, under different scenarios, my tax liability jumps when I add the IRA value for EOY 2019. I provided it outside the interview process. Is that also correct, when all transactions are within the same year, to and from the same Traditional IRA?

[macuser_22]

AFAIK the "repayment" of distribution only applies to active military called to duty.  You should answer no to that question - it is simply a new contribution and a distribution unrelated to each other.

You said that you have deducted the contribution each year so there would be no non-deductible (after-tax "basis") in the IRA so the end balance questions do not apply.   That question will only be asked to calculate the taxable amount on a 8606 form IF there is non-deductible (after-tax basis) in the account.

[FTERoo]

Thank you, this helps.

[FTERoo]

After further scenario reviews and testing of calculations, TurboTax is treating the $6,000 2019 contribution as Non-Deductible (correct) and entering that amount on Line 1 of the newly created 8606.

Per the help on Form 8606, ALL data on the 8606 come from other entries and calculation's from TurboTax.

Without PREVIOUS non-deductible contributions, and a current year distribution, the program nets these items together, 

[macuser_22]

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@FTERoo wrote:

After further scenario reviews and testing of calculations, TurboTax is treating the $6,000 2019 contribution as Non-Deductible (correct) and entering that amount on Line 1 of the newly created 8606.

Per the help on Form 8606, ALL data on the 8606 come from other entries and calculation's from TurboTax.

Without PREVIOUS non-deductible contributions, and a current year distribution, the program nets these items together, 

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Your 2019 contribution  should be on the 8606 line 1. 

I am not sure what you mean by: "Without PREVIOUS non-deductible contributions, and a current year distribution, the program nets these items together,"    Nets (adds) what items together?   

Any prior year non-deductible contribution entered when  the 1099-R interview asks for them should be on the 8606 line 2.

[FTERoo]

Sorry I wasn't clear. I'll try again, as this seems to be a rare situation. Even tax professionals and my broker aren't clear on it. It's simple, but requires specific detail.

Context: MFS is the filing Status, and the same IRA account is source and destination for both contributions and distribution.

• $6k is the contribution. Regular deposits, all  year long, all 2019.
• For the sake of the math, $15k was the distribution amount, early 2019.
• MFS triggers the $10,000 income limitation on the $6,000 contribution, so it is correctly "not deductible".

New to me:

•  $6k ends up on Line 1 of 8606. This seems logical.
• No previous non-deductible amounts, so 8606 Line 2 is -0-.
• Line 13 is $6k, with an asterisk, referencing IRS Pub 590-B
• Line 14 is -0-
• Line 15a, and 15c are $9k, which passes to "Form 1040 or 1040-SR, line 4b; or 2019 Form 1040-NR, line 16b"
  • 15c also has an asterisk, referencing IRS Pub 590-B

The netting of amounts I referred to previously is  +$15,000 - $6,000=$9,000. This calculation is not really documented anywhere with a smart worksheet, or a working model of the referenced IRS 590-B worksheet, it just shows up on 15a, with that asterisk(*).

The effect of this on the tax return makes the $6,000 a "functional" deduction adjustment to AGI. In this particular situation (apparently rare), none of my contacts has seen this calculation, and it does look odd.

Although ruled non-deductible under the MFS/$10k limit (which is absurd and bizarre):

•  because the distribution and contribution all occur in 2019
•  and the referenced IRS 590-B worksheet
•  the total $15k distribution is REDUCED by the $6k contribution
• to create the taxable amount of the distribution of $9k.

The contribution ends up "deductible", but in a back door kind of way.

Usually, the IRS is not generous. Any detail or confirmation will bolster my case with my contacts. A couple of alternative sites were inconclusive, and my tax professional has not yet run this scenario and returned my call.

My broker thinks TurboTax is wrong. Since TurboTax backs it's calculations with a guarantee, I'm inclined to proceed.

[macuser_22 · Accepted solution]

The "*" (asterisk) on line 15 means that TurboTax did the calculations on the "Taxable IRA Distributions Worksheet" that is almost the same as the 8606 lines 6-15.   

I cannot calculate what the taxable amount should be for your figures without knowing the total 2019 year end aggregate value of all existing Traditional, SEP and SIMPLE IRA accounts that might exist.   That will determine how must of the $15K distribution should be taxable.

The interview asks for the prior year non-deductible contributions that you say is zero (the 2019 $6K is already on the 8606 line 1 so it does not get entered again) then then interviews asks for that 2019 year end value of all IRA accounts.    The calculations will not be correct without that amount (and yes it will "appear" to lower your refund, or raise the tax owed,  because the accurate amounts cannot be calculated without that value.)

The non-deductible $6,000 "basis" must ALWAYS be pro-rated between the current years distribution and the remaining 2019 year end value of the aggravate value of all IRA accounts - you can never withdraw only the basis - so, as long as any IRA account exists, there will always be some remaining basis.  Only when all accounts are distributed and closed will the basis become zero.

From your post, I believe that is the problem.

[FTERoo]

Thank you for your reply. Version is Home & Business, desktop.

The 8606 Line 6 links to the IRA Info worksheet in the FORMS VIEW. I step in and out of VIEW, from Interview to Forms and back again.

I haven't seen ANY interview question for entering the total year end IRA value in the interview. Just IRA contributions and support for that contribution. A path where you see that question would be helpful.

• If I manually enter the IRA Info worksheet , Part IV, line 18 value, the $6k contribution is prorated.
• If line 18 as above is never entered, or the manual entry is deleted, the topic doesn't come up in the interview. If the value on that line is missing, no error is generated.
• I originally entered it manually as an experiment, and went looking for the interview reference, because no other previous year's return has ever requested this information.

Providing this information here makes sense, and lines up with what I would expect from the IRS. That the interview does not address it (knowing that there is a distribution) drove me to opening this discussion.

The change is a $400 impact, which I of course would like to avoid! That said, I want to do this correctly.

Your explanation lines up with what I would expect, but this version of TurboTax doesn't handle it clearly, nor do the HELP? explanations clarify proper treatment.

[macuser_22]

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@FTERoo wrote:

The change is a $400 impact, which I of course would like to avoid! That said, I want to do this correctly.

Your explanation lines up with what I would expect, but this version of TurboTax doesn't handle it clearly, nor do the HELP? explanations clarify proper treatment.

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If course it results in an impact  because without the year end value the entire non-deductible basis is applied and that is not correct.

Make sure that the IRA/SEP/SIMPLE box on your 1099-R is checked and that you checked it in TurboTax.  You will not get the questions if it is not checked.

When going through the 1099-R interview do not stop at the 1099-R summary screen (where you can add another 1099-R)  press Continue and keep going until you get the screens below:

I will add a couple of screen shots.....

OK - I have been testing this and I believe that you have uncovered a bug.   I cannot believe that it is just appearing now unless a recent update broke something,

When I got to the screen that asks to enter the Total Basis form 2018 or earlier and there is none, then the next screen to enter the 2019 year end value is skipped even though there is a 2019 basis on the 8606 form line 1 - that is not correct - the 2019 year end total value should always come up.

As a workaround I entered $1 of 2018 basis then then I got the next screen for the year end value, entered that and then press BACK (not continue) and remove the $1 (make the box blank).  Then when I continue, I do get the next screen where the year end value goes and press continue on that screen. 

After that the 8606 is correct.

@dmertz If you are around, can you confirm this?

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[dmertz]

I think I've seen this problem before where TurboTax fails to ask for the year-end value under these or similar circumstances.  I also think that I came up with the same workaround to force the question to be asked.  I'll be able to check my notes later today to see if I ever reported it.

[macuser_22]

I am reporting it now.   I tested 2018 and it behaves the same way.

[dmertz]

I don't find mention of it in my bug notes, but I'm pretty sure I encountered it before.

[FTERoo]

Can we claim a bounty for finding a bug? 😁

I was going to send some screen shots earlier, but thought that might be overkill. Since you did, here is the sequence of screens....

First, everything is entered correctly on the 1099-R.

• Tax WAS withheld.
• The sequence of IRA Questions is.....
• Yes on the following brings up the RESERVIST? Q (NO), Then AMT Screen.
• NO, brings up the AMT screen.

I never GET a basis question on the interview.

[dmertz · Accepted solution]

Since you are using the CD/download version of TurboTax, you can also switch to forms mode, open the IRA Information Worksheet and make the year-end value entry directly on line 18.  After this entry is made, I believe that TurboTax does present the year-end page, but of course that's not too helpful at that point.  Those using the online version of TurboTax would need to use the workaround described by macuser_22.

[FTERoo]

This is clarifies the issue as a full explanation re: the proper  function of the 8606, a form I have not encountered before.

Thanks for working through this with me.

• I was counting on the accuracy of TurboTax's calculations and linking between forms.
• Help? and TurboTax's instructions weren't as clear as they could be either.

Obviously, I'm not the only TurboTax user impacted. I did receive an update to the software this AM, but this issue was not corrected in that update.