Traditional IRA contribution - change my mind

[mrohling]

Hi,

Need some help.  Last year, I opened a traditional IRA account and contributed $7K to it.  The next week, I changed my mind and withdrew the money.  I read that I can change my mind on the contribution and pull the money back out without penalty.  I have received my IRA statement from fidelity and it was loaded into turbotax.  The system is trying to charge me a penalty for early withdraw.  The distribution code on the form is 1-Early distribution (Except Roth IRA).  There is a long list of list of exceptions to choose from.  Which one do I select in my situation?

thanks

[macuser_22]

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@mrohling wrote:

Hi,

Need some help.  Last year, I opened a traditional IRA account and contributed $7K to it.  The next week, I changed my mind and withdrew the money.  I read that I can change my mind on the contribution and pull the money back out without penalty.  I have received my IRA statement from fidelity and it was loaded into turbotax.  The system is trying to charge me a penalty for early withdraw.  The distribution code on the form is 1-Early distribution (Except Roth IRA).  There is a long list of list of exceptions to choose from.  Which one do I select in my situation?

thanks

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First of all you have 7 days under tax law  to revoke a contribution and no form whatsoever should be issued.

Otherwise a "return of contribution" before the due date of the tax return should have a code 8 in box 7 (contribution returned is same year as contributed.)  

Contact Fidelity for a corrected 1099-R.

[mrohling]

Hi,

When I put in code "8 - return of contribution taxable in 2020" in box 7, the software calculates an early distribution.  Is there another code that refers to what you stated below?

Otherwise a "return of contribution" before the due date of the tax return should have a code 8 in box 7 (contribution returned is same year as contributed.)  

thanks

[macuser_22]

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@mrohling wrote:

Hi,

When I put in code "8 - return of contribution taxable in 2020" in box 7, the software calculates an early distribution.  Is there another code that refers to what you stated below?

Otherwise a "return of contribution" before the due date of the tax return should have a code 8 in box 7 (contribution returned is same year as contributed.)  

thanks

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Do you have a 1099-R with a code 8?   What is in box 2a?

Box 2a would have any earnings that were returned and that is taxable and subject to the penalty if yiu are under age 59 1/2.

[note answer edited to add information]

[macuser_22]

Above answer edited.

[mrohling]

I'm not understanding now, because I thought I was able to change my mind on my contribution.  I have a 1099-R, and box 1 = $7,000 and box 2a = $7,000.

I put the money in on 12/2/20 and took it back out on 12/4/20 because I changed my mind.  My understanding is that this would not cause a penalty even if I'm under 59 1/2 as I have the right to change my mind in the same tax year.  I was told that box 7 should have a code "8 - return of contribution taxable in 2020" to avoid a penalty, but it still triggered one.  Is there another code I should have fidelity put in an updated 1099-R to represent what I did?

thanks

[mrohling]

Should I have fidelity include this code in box 7?  

N--Recharacterized IRA contribution
made for 2020 and recharacterized in 2020

Does this represent changing your mind within 2 days of making a contribution?  

thanks

[macuser_22]

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@mrohling wrote:

Should I have fidelity include this code in box 7?  

N--Recharacterized IRA contribution
made for 2020 and recharacterized in 2020

Does this represent changing your mind within 2 days of making a contribution?  

thanks

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No.   Removing it is NOT a recharacterization.    It should have a code 8 of you asked the IRA custodian that the contribution be returned.   If you simply withdrew it yourself as a normal distribution then  it ill be taxable.

[mrohling]

Hi.  I did call Fidelity and asked them to withdraw the contribution for me.  I did not withdraw it on my own.  What is odd is that when I put in a code 8 in turbotax, it calculates a penalty as I mentioned before.  So, if I have fidelity update my 1099-R with a code 8 in box 7, I'm in the same boat from a turbotax perspective unless I'm misunderstanding what will happen.

[macuser_22]

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@mrohling wrote:

Hi.  I did call Fidelity and asked them to withdraw the contribution for me.  I did not withdraw it on my own.  What is odd is that when I put in a code 8 in turbotax, it calculates a penalty as I mentioned before.  So, if I have fidelity update my 1099-R with a code 8 in box 7, I'm in the same boat from a turbotax perspective unless I'm misunderstanding what will happen.

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You are not understanding - there is more wrong with your 1099-R then just the code in box 7.   The code 8 1099-R would have the amount contribution returned in box 1 and ONLY only earnings attributed to the contribution (probably only a few cents in a "few days") in box 2a.     Box 2a is the taxable amount which would probably be zero or close to it.

[mrohling]

Ok. that makes sense.  It looks like .01 cent was the actual earnings, so that should not even be an issue.  I will call fidelity about an updated 1009-R.  Thanks for your patience.

[mrohling]

ok. I talked to Fidelity and they told me the 1099-R is correct with a $7K distribution and since I'm under 59 1/2 they have to put in $7,000 in the taxable amount with a code 1 in box 7.  He said I need to use form 5498 along with the 1099R to give to my accountant to show the IRS what I did so a penalty is not calculated.   Any thoughts on that on how to represent that in turbotax?

thanks

[macuser_22]

Fidelity is ignoring the tax law and Federal regulations.   Somebody at Fidelity needs to wake up and follow the IRS 1099-R rules and Publication 590-B rules. 

You can probably spend hours trying to get to an upper level manager at Fidelity and their legal department of just delete the 1099-R and enter it as a "substitute 1099-R"  with the amount returned in box 1, the earnings (or 0) in box 2a and a code 8 in box 7 and the IRA/SEP/SIMPLE box checked.

TurboTax will as for an explanation for why a substitute is being used and the steps you took to have the improper 1099-R corrected.   Enter the information  from this thread and that Fidelity refused to correct their error.  That this was a simple return of contribution (or revoke)  within 5 days.  

(You are probably the 10th recent poster in tihs forum with similar Fidelity problems that Fidelity refuses to acknowledge or correct.    You could also file a complaint with your states bank regulators or Federal regulators.)

[mrohling]

Hi.

I went ahead and entered the 1099-R as stated on the form and made sure that I put in my 2020 contribution, so that both the contribution and distribution were put in correctly.  Turbotax must of realized this was a pull back/reversal of my contribution as it did an analysis calculation in form 8606 to determine my taxable/non-taxable amount.  I ended up with no taxable income or penalties, which is what should have happened since I my contribution was only in the account for 2 days.

So, it looks like everything worked fine, once I had both the 2020 distribution and contribution entered correctly.   I walked through the 8606 calculation worksheet and it looks like it worked correctly.

thanks for you help.

[macuser_22]

That will only work if the total Dec 31, 2020 year end value of ALL existing Traditional, SEP, and SIMPLE IRA accounts that you have was zero, otherwise only a part of the tax would be offset by a non-deductible contribution.