I made a nondeductible contribution but paid taxes on it. I didn’t remove the $ from the IRA. As I paid taxes on the contribution, do I have excess contributions?

[MickeyB]

In 2012, I made an IRA contribution of $6,000.  I deducted the IRA from my 2011 taxes.  In 2012, I received notification from the IRS that I owed taxes on the $6,000 because I also had a 401K.  I amended my 2011 taxes and paid the taxes on the $6,000 to both Federal and to state.  I did not remove the $6,000 from the IRA (I didn't know to do so).  As I paid tax on the contribution, do I have excess contributions?

[Critter · Accepted solution]

No ... it was not an excess contribution... it was a non deductible contribution which is added to any other basis you have in the IRA if any.  When you take distributions from the IRA this basis amount will come into play so you don't pay taxes on the same amount twice. 

[macuser_22]

If you did the amendment properly by entering the Traditional IRA contribution in the IRA contribution section and specifying that is was non-deductible (TurboTax should have done that automatically if you has first entered all of your income and W-2's with the 401(k) information - TurboTax would tell you that you did not qualify for a deduction and make it non-deductible) then TurboTax would have included a 8606 form with the amended return that shows and tracks your non-deductible basis in the IRA.   That 8606 is necessary when you eventually take a distribution from the IRA.  You can never only remove the non-deductible part because it must be pro-rated over the distribution and total value of all Traditional IRA accounts.   Those calculations are done on a new 8606 form using the information from the last filed 8606 form to get the information.

[Critter]

Print a copy of the 8606 and put it with your IRA papers so you have it 20 years from now when you need it and you no longer have your tax returns in hand.

[fanfare]

If you amended your return to simply remove the disallowed deduction, then you don't have a Form 8606 to file away. Your basis in IRAs is now $6,000.

[MickeyB]

I am close to 70 1/2 and am trying to complete my papers for Required Minimum Distribution.  I need to know if the about puts me into an excess contribution situation?  Also, as I didn't remove the contribution, will I be penalized?

[fanfare]

You don't have an excess. Once you have a basis, you have to file Form 8606 with each RMD until all your IRAs go to zero.

[fanfare]

If you don't understand this, please refer to IRS Pub 590B at <a rel="nofollow" target="_blank" href="http://www.irs.gov">www.irs.gov</a>. If you're like most people, you'll have to read it several times to figure it out.