Opened IRA last year then changed mind a month later and closed it. Do I amend the 2022 return or what?

[Raeka]

After I opened the account last year, a couple of weeks later I spoke with someone and asked them to refund it back to my bank account and close it. But now this year I see they sent me a 1099-R. My 2022 shows the amount I put on last year's return on Form 1040, line 20. I didn't see where it decreased my tax last year after I opened it. I don't want the IRA and so what to do now? Should I amend my 2022 personal return? What is the effect of this 1099-R which shows the total amounts put in and taken out on lines 1 and 2a of that 1099-R ?

[fanfare]

does the 1099-R say Code "1" or "2" in Box 7.?

If you have the total amount in Box 2a, you did not get the desired action from your custodian.

That's a problem.

[Raeka]

Box
Copy B: Report this income on your federal tax return. If this form shows federal income tax withheld in box 4,
attach this copy to your return.
1 Gross distribution 5,050.00
2a Taxable amount 5,050.00
2b Taxable amount not determined
Total Distribution
3 Capital gains (included in box 2a)
4 Federal income tax withheld
5 Employee contributions/Designated Roth contributions or
insurance premiums
6 Net unrealized appreciation in employers securities
7 Distribution codes 7
IRA/SEP/SIMPLE [X]

[dmertz]

The Form 1099-R implies that you made a reportable traditional IRA contribution and a reportable traditional IRA distribution, not a return of contribution.

[Raeka]

So what are the implications of this? I didn't receive any interest on it and it was opened and closed within about a 30 days span. I also didn't see where it reduced my 2022 taxes.

So I'm back at my original question: Should I amend my 2022 return or/and what happens when I report this 1099-R?

[ThomasM125]

I think what you mean is you made an IRA contribution in 2022 for $5,050 and then withdrew the same amount from the retirement plan in 2023. You correctly reported the contribution on your 2022 tax return. If so, the contribution in 2022 should have reduced your taxable income in that year by up to $5,050, assuming the contribution was tax deductible. Based on the code 7 of the 1900-R it would appear that the distribution is taxable in 2023, as it was tax deductible when you contributed it in 2022.

So, the distribution in 2023 will be entered as taxable income on your 2023 return.

It's possible that you designated the contribution as non-deductible on your 2022 return, in which case when you enter the 1099-R in TurboTax in 2023, you need to indicate that you made non-deductible contributions to your IRA and the program will ask you questions to determine if the distribution is taxable.

[Raeka]

ThomasM125

  Hi. No I meant what I said. Opened it 2/27/23 and closed it 3/07/23. It was opened while I was doing the 2022 return.

I am amending the 2022 return.

[MonikaK1 · Accepted solution]

The effect of the contribution and withdrawal on your tax returns depends on whether the 2022 contribution was deductible. You don't need to amend your 2022 return in order to handle the 1099-R for 2023 correctly unless there was an error on the 2022 return.

If the IRA contribution that you made in 2023 and entered on your 2022 return reduced your taxable income for that tax year, then when you withdrew the amount in 2023, the amount would be taxable on your 2023 return.

If your contribution reported on the 2022 return wasn't deductible, then as @ThomasM125 states, you would still enter the withdrawal on your 2023 return but indicate where prompted in TurboTax that you made non-deductible contributions to your IRA. Your 2022 return should include a Form 8606 if you reported contributions that weren't deductible.

See this TurboTax tips article regarding Form 8606 and nondeductible IRA contributions.

Any money you contribute to a traditional IRA that you do not deduct on your tax return is a “nondeductible contribution.” You still must report these contributions on your return, and you use Form 8606 to do so.

Reporting them saves you money down the road. That’s because no individual’s money is supposed to be subject to federal income tax twice. Form 8606 gets it “on the record” that a portion of the money in your IRA has already been taxed. Later on, when you take distributions, a portion of the money you get back will not be subject to income tax.

TurboTax will ask you questions in the 1099-R section to determine if the distribution is taxable.

See this IRS webpage regarding the IRA deduction limits.

If you don't report the 1099-R on your 2023 return, the IRS information matching program will pick it up and may generate a notice proposing to tax the amount.

[Raeka]

Hello @MonikaK1   and thank you for the details.

I have to amend the 2022 anyway for some other things so maybe I can do something regarding this?

For year 2022, my tax liability was the same as my self employment  tax in 2022. When I did the return in 2023, the amount of tax owed that it was showing did not change after I opened and added the IRA.

I may have handled the $5,000 incorrectly when I did return last year because I do not have a form
8606 in my files from that year.

Looking at that 2022 return now, on the IRA Contributions worksheet, under Deductible and Non-deductible Traditional IRA Contributions,  it shows the $5,000 on line 12 for Deductible contributions and on line 13 for Nondeductible contributions it shows 0.

Then on that same worksheet, at bottom, lines 16 - 18, it states
"Deductible traditional IRA contribution to Schedule 1 (Form 1040),
Line 19: $5,000
Nondeductible Line 18: 0.

Looking for that amt. on the 1040 Schedule 1 and it shows the $5,000 on line 20 (not line 19 which is for alimony)  (We have 1040-SR so maybe lines are different.)

On page 2 of the 1040-SR, that amount was part of the total in line 10 adjustments to income and line 11 was less than the line 12 Standard deduction. Taxable income on 15 was 0.

When I called SoFi the phone person told me to list it on the 2023 return as "excess contribution withdrawal" and it wouldn't be taxable. I haven't done 2023 yet so not sure where that option pops up.

Since I have to amend 2022 return anyway, what is best way to proceed to make this cleaner? Should I have listed it as a non-deductible contribution or is that something I had no control over since its listed that way? What should I have done to get that Form 8606 which I don't have?

Thanks so much for your help!

[MonikaK1 · Accepted solution]

The easiest solution now is to enter the Form 1099-R you received on your 2023 return. It wasn't a withdrawal of an excess contribution - you deducted the amount you contributed and you were qualified to deduct.

You qualified to take the deduction and you found that it appeared on your 2022 return, so it wasn't a nondeductible contribution, though your total adjustments to income reduced your adjusted gross income below your standard deduction and so you only ended up paying self-employment tax.

The IRS information return matching program will be looking for the 1099-R to appear on your 2023 return.

See this TurboTax help article for an explanation of excess contributions.

[Raeka]

Hi,

I finished amending the 2022 return yesterday and they had a question about if it was nondeductible. This time I said yes and it wasn't included in my deductions and TT generated the form 8606 you mentioned before. So now I am doing the 2023 return. I've just added the 1099-R and its asking some questions about it.

[DanaB27 · Accepted solution]

To confirm, you amended your 2022 tax return and now have a 2022 Form 8606 showing your contribution amount on line 14 as your basis (nondeductible traditional IRA contribution)?

If yes then you will enter this basis during the interview when you enter your 2023 Form 1099-R:

1. Click on "Search" on the top right and type “1099-R”  
2. Click on “Jump to 1099-R”
3. Click "Continue" and enter the information from your 1099-R
4. On the "Review your 1099-R info" screen click "Continue"
5. Answer "Yes" to "Any nondeductible Contributions to your IRA?" since you had any nondeductible contributions in prior years.
6. Answer the questions about the basis from line 14 of your 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@Raeka