Glitch

[amlexpert]

Re: Premier. In 2023, my daughter worked approximately 1 month before resigning her long term position with 401k. She later contributed to an IRA.  The glitch is: when she updated her W2 info with correct box 12 info, it added her 401k contribution to income (more than 1:1) increasing her taxes by over $1500. Summary: she was under a retirement system for one month and an income investor the rest. Her IRA contribution was accepted as a deduction, but her 401k box 12 items were skewed into more income. How?

[VolvoGirl]

Did you enter the IRA contribution before the W2?  You can't deduct an IRA contribution if you had a 401K account even for 1 day.  So she made an excess IRA contribution.  It's the IRA that's causing the tax.   I think she has to remove the contribution from the IRA account.  @dmertz 

[fanfare]

If there is enough earned income, you can still contribute to IRA, but it is not deductible.

@VolvoGirl 

you may withdraw it as "excess plus earnings" if carrying a basis in Traditional IRA bothers you.

[fanfare]

If you want to remove 2023 excess plus earnings you must

do it now before tax day, OR

timely file tax return , or timely request extension, either of which which gives you until Oct 15.

If you file first, you would have to amend.

[dmertz]

Right.  The indication that she participated in a workplace retirement plan has apparently made some or all of her traditional IRA contribution nondeductible due to her MAGI being above the corresponding threshold for her filing status.

Depending on her MAGI and filing status, she might be eligible to make a Roth IRA contribution, in which case it would make sense to recharacterize the traditional IRA contribution to be a Roth IRA contribution instead, rather than obtain a return of contribution.  Also, if she has no other funds in a traditional IRA and she is ineligible to contribute directly to a Roth IRA, it would make sense to keep the nondeductible traditional IRA contribution and in 2024 do a Roth conversion.