$7000 Excess Contribution to Traditional IRA in 2022.

[CHRIS5000]

I am 61 yrs old and have just qualified for Social Security in Oct 2023.

In 2022, I contributed $7000 total to my Traditional IRA in 3 separate transfers from my regular saving account to my Traditional IRA account. I had only made $4000 unemployment in 2022, so I understand what I did was make an excess contribution. I did not realize this until now and two Decembers have gone and past so I realize I have two %6 penalties to make up for. I did not use the $7000 as a deduction for year 2022 as I didn't need to do so.

I understand that by using form 8086 I may be able to amend 2022 taxes and designate this as a none deductible contribution but I rather not do so as keeping track of its earnings is a bit too much for me.

I want to know how to proceed the best way and get a few questions answered.

1. Since the $7000 was not used in reducing my 2022 income, am I forced to claim it as a none deductible contribution then have to file form 8086 ?

2. Since the $7000 was not used in reducing my 2022 income and it was below the $7500 allowed for someone my age, when I have ETRADE remove it, will this $7000 be counted as income?

3. If the $7000 distribution Is not considered income, I may just want to leave it in and invest in a 9month  5.5% CD and distribute it before Dec 31, 2024 to avoid a third 6% penalty. Would that be sensible ?

If the $7000 distribution is considered income, then I may have to distribute it in 2025 as it may disqualify me for some programs that have income limits.

I have filled out form 5329 for 2022 with a 6% $420 penalty and have not sent it in yet with the check.

Thank You

[dmertz]

"I understand that by using form 8086 I may be able to amend 2022 taxes and designate this as a none deductible contribution"

No, that doesn't work.  An excess contribution is already a nondeductible contribution.  If you did not reported the excess contribution on a 2022 Form 5329, you must amend 2022 to include the 2022 Form 5329 and pay the 6% penalty.

Assuming that you did not have the compensation in 2023 to be able to apply the excess as part of your contribution for 2023, your 2023 tax return must similarly include 2023 Form 5329 to assess the 6% penalty again for 2023.

To correct the excess in 2024, you must take a distribution equal from your traditional IRA equal to the excess with no adjustment for investment gain or loss.  In 2024 TurboTax you'll enter the a Form 1099-R that reports only this distribution and indicate to TurboTax that it's a distribution of the excess by entering on TurboTax's 1099-R form a zero in box 2a instead of the amount shown in box 2a of the Form 1099-R provided by the payer.  TurboTax will then prompt you to prepare an explanation statement regarding the distribution of the excess.

[CHRIS5000]

TY

Now last question: when I take the $7000 out, will that be counted then as  income:

So in other words, does the following apply to me :

Excess Contributions Withdrawn After Due Date of Return

In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

• Total contributions (other than rollover contributions) for 2022 to your IRA weren’t more than $6,000 ($7,000 if you are age 50 or older).

• You didn’t take a deduction for the excess contribution being withdrawn.

The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.

Thank you very much for the help Demertz, I really appreciate it.

[dmertz]

Yes, this would be an excess contribution withdrawn after the due date.  You indicate that to TurboTax by entering $0 instead of $7,000 into box 2a of 2024 TurboTax's 1099-R form next year.

[CHRIS5000]

Thats good to hear.

Thanks again.