I made a $7000 contribution (max for my age) to my Traditional IRA in Feb. 2022 for 2021 tax year. The contribution turned out to be non-deductible due to high income for the year. Using TurboTax, I filed 2021 tax return prior to April due date with form 8606. I realized I had until Oct. 2022 to have the funds returned to me without tax consequences. I requested a withdrawal of the $7000. My Custodian returned $7000 to me in Sept. 2022 (no gains, since there was a loss) under Excess Contributions. First question to clarify terminology:
*Are non-deductible contributions considered Excess contributions once determined non-deductible?
From reading IRA forms/instructions, I understand I have to file an amendment for my 2021 tax return. Using TurboTax:
*What forms do I need to fill/modify?
*Should I modify/create form 8606?
*How about 1099R, since I don't have one for 2021?
*Where do I report losses?
*What else do I need to do?
Thank you all in advance for your help.
The amendment must be filed on paper and mailed to include the manually prepared amended Form 8606.
The as I've said several times before, line 1 of the amended Form 8606 will have a zero on line 1 because with the contribution returned there is no contribution to report. You'll also have a zeros other lines in part 1 where you previously had non-zero amounts. Leave line 6 blank since it's not involved in any calculations on Part I.
If there was a loss in value of the overall IRA account while the $7,000 was in the account, a proper return of the $7,000 return of contribution would have resulted in a distribution of less than $7,000. If $7,000 was distributed, it seems that you requested a regular distribution, not a return of contribution, in which case you may have no changes to your 2021 tax return and a $7,000 distribution that is reportable on your 2022 tax return that may be substantially taxable (if you have other money still in your traditional IRAs) and, if you are under age 59½, subject to an early-distribution penalty. A regular distribution be indicated on the Form 1099-R with code 1 or code 7 depending on your age.
For example, if the IRA lost 10% in the interim, a proper return of the $7,000 contribution would have resulted in a distribution of $6,300, normally calculated by the IRA custodian when asked to make an explicit return of contribution.
The lost value is not reportable.
Thanks for your reply, but it is very confusing.
As I described on my original post, my contribution ($7000) was returned to me under "Excess Contribution".
I'm just trying to get my non-deductible contribution back without paying tax twice. What do I need to do??
"My Custodian returned $7000 to me" in your original post above seems to say that exactly $7,000 was paid to you from the IRA. Did the custodian actually distribute less than $7,000 to you?
Under no circumstances will you being paying taxes twice on the same money.
No, my custodian distributed $7000 (the original amount of contribution) under "Excess contribution". We figured losses using Worksheet 1-3 of form 540-A. It has been my understanding that gains need to be reported for taxes due, otherwise the contributed amount. What is the downside of receiving full amount Vs. full amount less losses??
Refer back to my original reply. With net losses the calculation on Worksheet 1-3 of IRS Pub 590-A should have resulted in negative numbers on lines 4, 5 and 6, with the amount to be distributed shown on line 7 being less than the $7,000 on line 1. Using Worksheet 1-3 assumes that you timely filed your 2021 tax return, otherwise a return in September 2022 of this contribution was not permissible and the distribution would just be a regular distribution.
Because the custodian distributed the wrong amount, it's not clear how the custodian will be reporting this distribution, but the reporting will not reflect a proper return of contribution. It should be reported on two 2022 Forms 1099-R, one showing a return of contribution with the correct amount (less than $7,000) in box 1 and a zero in box 2 and probably codes 1 and P or 7 and P in box 7, depending on your age, and a second Form 1099-R with just code 1 or code 7 showing the extra amount distributed.
Because it has been less than 60 days since the distribution of the extra amount, you could roll that money back into the IRA assuming that this would not result in a violation of the one-rollover-per-12-months rule. Still, you would need to get the custodian to report the distribution correctly as I described above. If they refuse to do so you would need to file substitute Forms 1099-R to report the distribution correctly.
If this gets sorted out correctly, you would amend your 2021 tax return to correct the Form 8606 to show zero on line 1 instead of $7,000, with that change flowing through the rest of Part I of that form. I would probably not amend anything until you actually have the Forms 1099-R from the custodian near the end of January 2023. When you do amend you'll need to include in the explanation that the amendment is being "Filed pursuant to section 301.9100-2."
Thank you demertz for the thorough explanation.
Let me clarify some things. I did file our 2021 taxes on time, so the distribution should be considered return of non-deductible contributions. I received the full amount ($7000) from my custodian Vs. amount less losses. They tell me the full $7000 will be on the 1099R that will be issued with code 8 on box 7.
Here is my question. Suppose I file 1040X, reporting $7000 that was distributed on a substitute 1099R (as allowed in TurboTax), that will match the actual 1099R that will be issued in Jan. 2023. Will I be penalized because the wrong amount was reported? Will I be taxed for the extra amount reported?
Will I need to amend 8606 with 1040X?
If I wait for the 1099R in 2023, won't it be too late (past 6 months) to file an amendment for the return of 2021 contributions??
A code-8 2022 Form 1099-R with $7,000 in box 1 for a return of a $7,000 contribution means that the custodian is saying that there was no investment loss or gain. Because your explanation required to accompany your amended 2021 tax return regarding the return of contribution needs to describe the calculation of Net Income Attributable, that explanation would be in conflict with the details of the Form 1099-R unless your explanation incorrectly (fraudulently) stated that there was no loss or gain.
To be a valid return of a contribution made for 2021 the distribution must be done before October 15, 2022. That has already happened (and then some). Because the distribution was made timely there is no problem waiting until 2023 to amend.
Since the custodian knows that there was a return of contribution, as I indicated before the $7,000 distribution needs to be split between a correct return of contribution and a regular distribution, with a separate Form 1099-R issued for each portion. If not rolled over, the portion that is a regular distribution is taxable and potentially subject to an early-distribution penalty depending on your age. The portion that is the regular distribution is eligible for rollover, so there is time to undo the error, but doing so will require either getting the custodian to report the distributions of the separate portions correctly or you will have to file substitute Forms 1099-R showing those corrections.
(The fact that the custodian messed this up to begin with suggests that they might not have the skills needed to make the reporting correct. What did they think was the point of doing the NIA calculation if they were just going to distribute $7,000 anyway? The fact that there were losses suggests that the IRA was with a brokerage rather than a bank and I would expect a brokerage to have a system in place for automatically determining the correct distribution amount for a return of contribution so that this sort of error would not be possible.)
Thank you so much for clarifying yet again this complicated subject (for my fried brain!).
I understand the first two paragraphs, the third one, not so much. Can you please clarify "correct return of contribution" and "regular distribution"? Do you mean "correct return of contribution = 7000-losses"? What is "regular distribution" in this case?
Doesn't roll-over mean reversing the transaction (return 7000 to IRA)? Once it is returned, it can be re-distributed correctly including losses? Wouldn't the corrected distribution be reported on 1099R?
Different question - if I were able to undo the distribution, will it be better to move it to a Roth? Will there be filing advantages or another can of warms??
If the custodian gives you $7,000 and says that you will see code 8 on your 1099-R (taxable amount zero),
then what's the problem?
OK the custodian gave you more than they should have.
That's not your problem.
I don't see anything fraudulent about it. Your IRA is now smaller than it otherwise would be.
On 1040-X either way, you attach your corrected Form 8606 ($7,000).
Thank you fanfare.
I'm now even more confused.
On 1040X, how do I explain the distribution without any gains/losses when creating a substitute 1099R?? It asks for detail explanation of calculations.
Should I ask my custodian to reverse the distribution or not?
@fanfare , following the law with regard to distributions from IRAs is always the responsibility of the participant. Distributing $7,000 for a return of a $7,000 contribution when the IRA has incurred losses in the interim is not following the law with regard to a return of contribution before the due date of the tax return, which is what code 8 is reporting. Claiming on the required explanation statement that there were no losses so as to correspond to the reporting of a $7,000 code-8 distribution would be fraudulent when you know that there were losses. Doing so would report the distribution as entirely nontaxable when the amount in excess of what should have been distributed is actually subject to taxation. Lying on your tax return such that you avoid paying required taxes is clearly tax fraud.
Thank you dmertz. I agree with you and am trying to do the right thing. Getting back to my questions:
- Is reversing the distribution considered a roll-over? If so, isn't there a limitation on one roll-over per 12 months? If so, I won't be able to reverse the distribution, as I have had a roll-over within the last 12 months.
- What are my options?
- What explanations should I enter for filing a 1040X and 1099R?
Putting a regular distribution back into an IRA is a rollover. I did mention in an earlier post here that such a rollover is only permissible if it does not violate the one-rollover-per-12-months limitation. Note that if you moved funds were moved by trustee-to-trustee transfer (which is neither a distribution nor a rollover) or if the rollover was to or from an employer plan that is not an IRA, those do not count toward the limitation. If you did do a reportable IRA-to-IRA distribution and rollover within the one-year period ending on the date of the September distribution, then you can't roll the regular distribution back into the traditional IRA. However, you can roll it over to a Roth IRA as a Roth conversion since those are also disregarded with respect to the limitation, but you would owe tax on the conversion.
The explanation accompanying your amendment would simply indicate the date of your original $7,000 contribution, the date and (correct) amount of the loss-adjusted distribution and that it was done pursuant to section 301.9100-2 of the tax code. Your amendment would also include the amended Form 8606 showing $0 on line 1. This explanation takes the place of any Forms 1099-R so no Form 1099-R is needed for the amendment.
If the custodian will not report the distributions correctly, you'll need to file substitute Forms 1099-R with your 2022 tax return reflecting what the custodian should have reported which include a description of your attempts to get the custodian to correct the reporting and why the custodian's reporting was incorrect.