Removing a Traditional IRA contribution for 2023 that became non dedutible

[gxt1]

My situation is very similar to this post, but not exactly the same.

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/unwanted-traditional-ira-contrib...

There was a mistake that was not caught until after filing that raised my AGI, making my ROTH deduction ineligible but the Traditional IRA contribution for my wife still eligible (per an extended phone conversation with the IRS).

Per the IRS Agent as long as the Roth contribution is withdrawn within 6 months of making the contribution along with any earnings, there no penalty or excess contributions to track. The Roth withdrawal has been requested and is in the works.

Doing the amended return in TurboTax I see my the contribution to the Traditional IRA for my wife is allowed but has become Non Deductible.

That does me no good, we're facing RMD's in a couple of years and If I can't get the tax break now, I'd rather not add to the RMD tax burden.

So the question is for 2023 in preparation for the amended return, is it OK to request the investment company to remove the Traditional IRA contribution (a change of mind).

If it is, is there a an allowed time to get it done (knowing the Roth removal was required within 6 months)?

Thanks in Advance! (always good to learn something new).

[dmertz · Accepted solution]

"... as long as the Roth contribution is withdrawn within 6 months of making the contribution along with any earnings, there no penalty or excess contributions to track. The Roth withdrawal has been requested and is in the works."

That's incorrect.  The deadline has nothing to do with the date that the IRA contribution for 2023 was made.  As long as by April 15, 2024 you filed your 2023 tax return or requested a filing extension, you have until October 15, 2024 to recharacterize or obtain a return of the IRA contribution, otherwise recharacterization or return of the contribution is not permitted.  As long as these deadlines are met, you are permitted to obtain a return of the traditional IRA a contribution made for 2023 regardless of whether the traditional IRA contribution is an excess contribution (which, in this case, it is not).

[gxt1]

Thanks much for the reply!

I got if figured out today while I was reading through the pubs waiting on hold to talk to the IRS, again. I never did get to speak to the person I needed as I was disconnected twice during (lengthy) holds. But it gave me plenty of time to read.

From Pub 1090a Page 30

When Can You Withdraw or Use Assets?

You can withdraw or use your traditional IRA assets at any time.

However, a 10% additional tax generally applies if
you withdraw or use IRA assets before you reach age
591/2.

Note. If you timely filed your 2023 tax return without
withdrawing a contribution that you made in 2023, you can
still have the contribution returned to you within 6 months
of the due date of your 2023 tax return, excluding extensions.
If you do, file an amended return with “Filed pursuant
to section 301.9100-2” written at the top. Report any
related earnings on the amended return and include an
explanation of the withdrawal.

I did make the actual contribution in 2024 (before April 15th) but for 2023 return. No doubt that's what they meant; any contribution made for 2023 can be removed within 6 months of the due date of the 2023 return, but had it been expressed as I just did, it would have been clearer.

It's interesting too that they make you remove earnings for the Traditional IRA along with the contribution. Removing earnings for Roth makes sense but for the Traditional IRA it's all going to get taxed in the end anyway. 

It's also interesting that the earned income is to be reported on the 2023 amended return.

[fanfare]

If you changed your mind, to get the earnings out you have to use the custodian's form "excess plus earnings" even though your IRA contribution is permitted.

This is the rule for removal before the tax due date (including extensions).

@gxt1 

[fanfare]

Even though it is now past April 17th 2024, you can still take the contribution back if you filed yiour tax return on time. IRS calls it timely filed.

If you have to amend because allocable earnings are greater than zero and/or you took a deduction, write "Filed pursuant to section 301.9100-2" on top of 2023 Form 1040-X

You already have the relevant paragraph in bold above.,

@gxt1 

[gxt1]

@fanfareThank you for the reply! Pursuant To, I was aware of but thank you again.

... to get the earnings out you have to use the custodian's form "excess plus earnings" even though your IRA contribution is permitted. This is the rule for removal before the tax due date (including extensions).

This is well after the tax due date with the refund in hand and for the Traditional IRA I did take a deduction. But once I discovered the error, I promptly (as in 1 business day) redid the taxes far enough to get a solid estimate of tax due and made an on-line payment to the IRS which should minimize any remaining negative outcome regardless of another few hundred worth of earning to report. I was already overpaying my work related taxes for the 2024 in anticipation of non taxed money that will be coming in, so that should handle any small residual tax due.

By "custodian's form", are you talking about the investment company's form or a form in TurboTax? So far no such form has appeared from the investment company but they did calculate the excess and reversed the Roth contribution along with the excess, it's easy to see in the account history and easy to capture for supporting documentation. Since I have to report the earning for the 2023 return, I just need to be sure that some future 1099 doesn't duplicate the same earnings for taxation in 2024.

Just to sum up the situation again: A mistake on my part resulted in a rise in reported income;

The Roth became ineligible so it had to be withdrawn (with earnings),

The Traditional was allowed but due to income could not be used for a deduction and will be removed (with earnings) as change of mind.

The paragraph from the IRS publication didn't specifically say how to report the earnings (or I haven't read far enough). I thought worst case, for both the Roth and the Traditional, I'd report it as miscellaneous income with detail.

[gxt1]

It looks the investment company is supposed to generate a 1099-R, I will ask them about it.

[gxt1]

Just for the sake of putting it out there, I did talk to the investment company and they will generate a 1099 for the reversed contribution earnings in the 2024 tax year. That makes sense to me but sure does seem to conflict with the IRS instructions to report the earnings on the 2023 return, and as already expressed ultimately leading to how to avoid getting taxed again on the earning in 2024.

[dmertz · Accepted solution]

The code in box 7 of the Form 1099-R will be code P to indicate that the earnings are taxable on the tax return for the year prior to the year of the form or will have code 8 to indicate that the earnings are taxable on the tax return of the same year as the the year of the form.  Because the wording of the statute was written before the tax code was changed to allow IRA contributions made by the due date of the tax return to be for the prior year, it's not clear which way a particular IRA custodian will code the return of a contribution that had been made for the prior year.  In the case of a 2024 Form 1099-R, if the custodian codes the form with code P, in means that the earnings are taxable on the 2023 tax return.  If the IRA custodian instead codes the 2024 Form 1099-R with code 8, the earnings will be taxable on the 2024 tax return.

[gxt1]

@dmertz Thank You dermetz! I asked the investment company yesterday (before posting) if the 1099 would include a code that would indicate exactly what you just said. I was told.."it's something you'll have to work out with the IRS".

You probably just saved me 1 1/2 hours of on hold time with IRS and the hope I wouldn't be disconnect multiple times again due to "system problems". This has been a unique situation for me and it's nice to know what to expect. I just put your answer in my 2024 tax folder! Thanks Again.

[gxt1]

@fanfareHi, I'm just double checking to make sure I don't mess this up, especially since I asked about both Roth and Traditional removals.

I deleted the Roth contribution in TurboTax for the amended return. I entered the earnings (from the Roth excess contribution removal) as other income with an explanation. So, it's essentially its as if the Roth contribution never happened (with the caveat that I have to pay tax on the earnings the excess contribution generated while in the Roth account)

I believe your answer is telling me I need to do the same thing for the removing the allowed Traditional IRA contribution.

Have the Investment Company remove the Traditional contribution and the calculated earnings.

Delete the Traditional Contribution from TurboTax

Report the earnings as other income for 2023

If my understanding is correct then I'm good to go.

Thanks so much to you and @dmertz for the advice!!

BTW - Side note

The end result of dry running this in TurboTax; is that while I have to pay a little tax on the removed earnings, removing the excess $7500 Roth contribution also deleted a tax of $450 on form 5329t. It's nice that something positive results.