I’m still new to US taxes and working in the U.S.
I started a new job in late 2022, my first in the U.S.
Last year at tax time, I opened an IRA and made a contribution, hoping to deduct it on my 2022 taxes. However, I didn’t realize that my employer had auto-enrolled me in their crappy 401(k) without my knowledge. (No match; bad investment options.)
I shut it down as soon as I realized but still had to report 401(k) contributions on my 2022 taxes so I was not able to get a tax deduction on the IRA.
I didn’t report the IRA contributions on my 2022 taxes but when I initially opened the account with the brokerage (Merrill Lynch) I selected 2022 tax year. That was before I knew about the 401(k) contributions.
I’m doing my taxes now (with an extension to Oct. 15) and wondering if I can apply the IRA contribution to my 2023 taxes? The contribution was made in 2023 prior to the April tax deadline.
Do I need to update something with Merrill Lynch first or can I just input the IRA contribution as 2023 in TurboTax?
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I'm pretty sure the answer is no, but I will wait for @dmertz .
Anything you could have done about the 2022 contribution would have to be done before October 15, 2023, if anything was even allowed. And you can't make a new contribution for 2023 after April 15, 2024.
But I want to point out an alternative. Since you made a non-deductible contribution for 2022, and if this is your only IRA contribution so far, you can convert that to a Roth IRA now, and only pay tax on any gains (increase in value). Then, you pay no more taxes when you withdraw it during retirement. You could then make a deductible contribution to a traditional IRA for 2024, and go forward from there (I believe 2023 is a lost cause at this late date).
If you leave the non-deductible IRA contribution in the traditional IRA and add deductible money on top, you create a situation with mixed contributions in a traditional IRA that requires a lot of paperwork to keep track of on your end. It would be greatly to your advantage to convert the non-deductible funds to a Roth IRA if you can.
As I understand it, in 2023 you made a traditional IRA contribution for 2022 and did not do anything by April 18, 2023 to have the IRA custodian reclassify the contribution as being for 2023 and did not request a return of this contribution by October, 15, 2023. Since participation in the 401(k) made you ineligible to deduct this contribution, you are required to have reported this contribution on 2022 Form 8606. If your tax return did not include that reporting you must amend 2022 to correct that. It cannot be treated as a contribution for 2023.
Note that the marking of box 13 Retirement plan on your 2022 Form W-2 indicates whether or not your were covered by this employer's retirement plan for 2022. Had you entered the traditional IRA contribution into TurboTax, TurboTax would have informed you of the deductibility of this contribution.
Thank you! Makes sense.
Thanks, appreciate the info!
I did enter the contribution into TurboTax for 2022 and it told me I was ineligible to deduct it due to the 401(k). I will check the 2022 return for form 8606 and amend if it’s not there.
@shinyonn wrote:
Thanks, appreciate the info!
I did enter the contribution into TurboTax for 2022 and it told me I was ineligible to deduct it due to the 401(k). I will check the 2022 return for form 8606 and amend if it’s not there.
Because of the problem of mixing deductible and non-deductible contributions in a traditional IRA, you need to save a copy of that form 8606 for as long as the mixed contribution exist (up to your entire life, if that's what happens). It is an exception to the rule that you can discard most tax papers after 3 or 7 years.
Very briefly:
Suppose you leave the non-deductible contributions in the IRA and add deductible contributions, plus you will have non-taxable earnings. Let's say that when you retire, the balance is $100,000, of which $6000 was the non-deductible contributions from 2022. You don't want to pay tax on that $6000 when you withdraw money, since you already paid tax. But the only way to document that is to keep copies of all your form 8606s. You can't just withdraw the $6000 tax free. If you withdraw $6000, and 6% of the balance is non-deductible ($6000 out of $100,000) then 6% of the withdrawal is tax free, and you have to keep track of this year over year until your IRAs are zeroed out.
If your only contributions at this time are non-deductible, you can convert them to a Roth IRA. The earnings will be taxed but not the contributions since you didn't take a tax deduction before. Then going forward, your Roth IRA will only have after-tax money and your traditional IRA will only have deductible (pre-tax) money. That will make things much easier in the future.
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