Traditional IRA contribution

[nwhite2397]

In calendar year 2024 I was not aware of the income limits for making a deductible IRA contribution. I contributed $6,500 to an IRA in March of 2024 to be applied to the previous year 2023 before filing taxes in April 2024 thinking it would be deductible. I then filed taxes and unknowingly had the contribution categorized as non-deductible since I was over the income limit for it to be deductible. Fast forward to December 2024 and I am just now finding out that the $6,500 was non-deductible. I have filed for a return of excess contribution from Fidelity. Here are my questions:

1) Was this return of excess contribution even allowed since I did not take the deduction when filing taxes and nothing was technically done wrong when taxes were filed? I would still like to remove the IRA contribution that way I could potentially do a back-door roth in the future.

2) Assuming the return of excess is allowed, how do I pay the 6% penalty? Do I report the excess contribution return when filing my 2024 taxes since the return of excess contribution took place in tax year 2024, or do I have to file an amended return for tax year 2023 since that is when the contribution was made?

3) Is there anything I'm missing in this scenario for what forms I'll have to file and when?

Thanks!

[Mike9241]

No. it is not allowed in your situation. 

Publication 590a says

You generally can make a tax-free withdrawal of contributions if you do it before the due date or extended due date (valid extension for 2023) for filing your tax return for the year in which you made them. You can do this if, for each contribution you withdraw, both of the following conditions apply.
- You did not take a deduction for the contribution.
- You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. 

- You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not the year in which you withdraw them.

- The 10% additional tax on distributions made before you reach age 59-1/2 does not apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59-1/2 rule, it will be subject to this tax.

[dmertz · Accepted solution]

1)  You could have obtained a return of the contribution had you done so by the October 15, 2024 deadline for doing so.  Of course you are now beyond that deadline, so you are stuck with the nondeductible contribution.

2)  There is no penalty on having made a nondeductible traditional IRA contribution provided that you had sufficient compensation to support the contribution.

3)   You'll need to track your basis in nondeductible traditional IRA contributions and track it for pro rata application to traditional IRA distributions until you no longer have any funds in traditional IRAs.  This is done on Form 8606 Part I which must be filed any year that you make a traditional IRA contribution or distribution that changes your basis in nondeductible traditional IRA contributions.