How do I get my non deductible IRA contribution back?

[shr22]

Hello experts,

I made a $7000 contribution to my IRA in early 2022 for 2021 tax year that turned out to be non deductible due to higher than anticipated income. I reported the contribution on form 8606 via TurboTax for 2021. I have received a taxable distribution for 2022.

- Can I get the non deductible contribution back as part of 2022 distributions tax free?

- What do I need to do for Federal and State (OR)?

Thank you.

[Opus 17]

First, if you under age 59-1/2, you will pay an extra 10% penalty for early withdrawal.   Did you mean to do this?

Second, you have 60 days from making an IRA withdrawal to change your mind and put the money back.  If the rest of this information makes you re-think your decision and it is less than 60 days, you can return the money to have more time to think about what you need to do. 

Now, it sounds like you already had an IRA.   Assuming that to be true, you now have a non-deductible (already taxed) basis in your IRA.  This is recorded on your form 8606.  You need to keep copies of your form 8606 basically for the rest of your life.  (Technically you only need the most recent one, but if you keep all of them you can prove the chain of events.)

Suppose your IRA is worth $50,000 but it contains $7000 of non-deductible contributions.  And suppose you withdraw $5000.  Because 14% of your IRA is non-deductible basis, 14% of the withdrawal ($700) is tax-free and the remaining $4300 is taxable.  Then, since you withdrew $700 of the non-deductible basis, your remaining IRA with a balance of $45,000 has a non-deductible basis of $6,300.  (All your withdrawals for 2022 are combined on your 2022 and your non-taxable percentage determined using the balance at the end of the year.)

Also note that all your traditional IRA balances are aggregated (combined) for this purpose.  If you have an IRA at Smith bank that is all deductible, and another IRA at Jones bank that has some non-deductible contributions, all your balances are added together and any withdrawal from either bank will be partly taxable and partly non-taxable.

Then in 2023, if you make another withdrawal, the non-taxable portion of the withdrawal will be calculated using the 2023 balance of the IRA and the updated non-deductible basis, and so on until you empty the account.

You can't "get it back."  You are stuck having a non-deductible basis in your IRA forever, unless you withdraw and close all your traditional IRAs or convert them to a Roth IRA.  In the example above with a $50,000 IRA with a $7000 non-deductible basis, if you converted the entire IRA to a Roth IRA, $7000 would be tax-free and you would pay income tax on the other $43,000.  But then, since it's a Roth IRA, you would never pay income tax again on any withdrawal. 

[shr22]

Thank you for the explanation Champ.

To clarify, I'm of age so no 10% penalty and I have one IRA account.

According to form 8606 instructions, I may have an opportunity  to get back the non deductible contribution? How do I interpret the instructions? Have I completely missed my chance as you mentioned before? If there is still a chance, how do I file an amendment Federal/State (OR)?

Return of IRA Contributions
If you timely filed your 2021 tax return
without withdrawing a contribution that
you made in 2021, you can still have the
contribution returned to you within 6
months of the due date of your 2021 tax
return, excluding extensions. If you do,
file an amended return for your 2021 tax
year 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
withdrawn contribution.

[Opus 17 · Accepted solution]

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@shr22 wrote:

Thank you for the explanation Champ.

To clarify, I'm of age so no 10% penalty and I have one IRA account.

According to form 8606 instructions, I may have an opportunity  to get back the non deductible contribution? How do I interpret the instructions? Have I completely missed my chance as you mentioned before? If there is still a chance, how do I file an amendment Federal/State (OR)?

Return of IRA Contributions
If you timely filed your 2021 tax return
without withdrawing a contribution that
you made in 2021, you can still have the
contribution returned to you within 6
months of the due date of your 2021 tax
return, excluding extensions. If you do,
file an amended return for your 2021 tax
year 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
withdrawn contribution.

---

Yes, that procedure is available to you if you complete the withdrawal and file the amended return by October 15, 2022.  However, that is not a "Regular" withdrawal.  You have to tell the IRA custodian before you make the withdrawal that you want to make a corrective withdrawal of a non-deductible contribution under section 301.   The custodian will send you the contribution (in this case, $7000) PLUS any earnings attributable to the contribution (if you have earnings, and haven't lost value in the present market.  If you lost value, you have to withdraw $7000, not the lower value it might have now.).  The earnings are reported as taxable income on your amended tax return, and since you won't have a 1099-R, you use a procedure in turbotax to create a substitute 1099-R to report the earnings.

If you did a regular withdrawal, that's going to count as a regular taxable withdrawal unless you can reverse it within the 60 days and then do a new corrective withdrawal.  If it is more than 60 days, you can tell the IRA custodian that you meant to do a corrective withdrawal ask them to please change the paperwork and reprocess it.  (They probably won't, but you can ask.)   If you took a regular withdrawal and it is too late to return it, you could still take a second withdrawal of the $7000 as a corrective withdrawal under section 301.  The first withdrawal would be taxable on your 2022 return. 

[shr22]

Thanks again Champ. Now that I seem to have a chance of getting back the contribution, how do I:

- create a substitute 1099-R?

- create an amended return? can I do this on TurboTax?

- do I need to create an amended Federal and State?

[rjs]

This is just a side note about another restriction that you should be aware of. If you make a regular withdrawal, and then put all or any part of it back into the IRA within 60 days, you have done a rollover. You can only do one rollover per year. And it's not by calendar year. You can't do another rollover until a full year after the date of the original withdrawal.

[fanfare]

" If you lost value, you have to withdraw $7000, not the lower value it might have now.).  "

@Opus 17 

Not correct. 

After the custodian calculates the gain/loss you get back $7,000 plus or minus that amount.

You report a withdrawal of the contribution ($7,000) on your tax return, and the earnings, if positive are taxable.

Custodian will supply the 1099-R but not in time.

@shr22 

[fanfare]

You have to amend because your Form 8606 has to be corrected.

While you're at it, you can report any positive earnings which goes on 1040 Line 4b

[shr22]

Thank you Fanfare. I understand I have to change form 8606 as well as reporting any gains/losses.

- What is the time frame for calculating gains/losses? I contributed 7k in Feb. 2022 for tax year 2021. Are the gains/losses from Feb. 2022 to now or Feb. 2022 to when I filed taxes or ???

- My Custodian is having a hard time calculating gains/losses. What am I to do if they can't provide what is required??

- Given the current market, there is probably losses rather than gains. Do I still report 7k or (7k - losses)? which line item do I report it in (1040 4a, 4b)?

Appreciate the help.

[fanfare · Accepted solution]

IRS publishes the formula for how to calculate the gain or loss.

It can be a messy calculation so that is why the custodian is expected to do it.

You can look up the formula, do the arithmetic and then take out the calculated amount as a withdrawal.

You'll have to explain what you did on your 1040-X.

You are undoing $7,000 dollar not-deductible  contribution, so that is the amount you must enter to unwind it

@shr22