Excess 2018 Traditional IRA contribution

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Topic Author
Ani
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Excess 2018 Traditional IRA contribution

Post by Ani »

I discovered this week that for my wife's traditional IRA @ Vanguard , I made an excess 5500$ contribution for the year 2018. (non-deductible)

Since 2017, due to income limits and work 401ks, all of our IRA contributions were non-deductible.

Will I still owe the 6% penalty on the 5500$ contribution, even though it was a non-deductible one.

What should I do about the gains on the 5500$ - move them to my bank account or move them to my taxable brokerage account at vanguard?

Thank you.
Doc7
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Re: Excess 2018 Traditional IRA contribution

Post by Doc7 »

Do you have to do anything with the gains?
I recently reported an excess Roth IRA contribution in 2019, paid the 6% tax, it was cleared out by no contributions in 2020 (so I did not owe 6% tax on any for that year) and left the matter at that. If you don’t contribute in 2021 but did in 2020 and 2019 you will owe the 6% three time (2018, 2019 return and 2020 return) but can let it be cleared out this year, right ?
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Probably a different set of rules apply to the Roth IRA.

My question is about an excess traditional IRA contribution.
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neurosphere
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Re: Excess 2018 Traditional IRA contribution

Post by neurosphere »

Ani wrote: Fri Apr 30, 2021 4:33 pm Probably a different set of rules apply to the Roth IRA.

My question is about an excess traditional IRA contribution.
Same rules for excess contributions to an IRA whether Roth or not (i.e. 6% penalty) but I don't know what to do with earnings. But details I here: https://www.irs.gov/publications/p590a# ... 1000230716
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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neurosphere
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Re: Excess 2018 Traditional IRA contribution

Post by neurosphere »

My skimming suggests excess contributions not removed by tax filing result in 6% penalty per year, whether deducted or not. Earnings removed are subject to income tax and an 10% early withdrawal penalty.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Thank you.

Not sure if I must go back and amend the 2018 tax return or I should just amend and report it all on the 2020 tax return.
Doc7
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Re: Excess 2018 Traditional IRA contribution

Post by Doc7 »

Ani wrote: Fri Apr 30, 2021 5:34 pm Thank you.

Not sure if I must go back and amend the 2018 tax return or I should just amend and report it all on the 2020 tax return.
You need to amend 2018 and send a check.
Amend 2019 and send a check.
2020 and send a check.

This assumes that you contributed each year. If you didn’t contribute in 19 or 20, the amended return will show that the carryover was cleared out and no excess check required, your amended return in that case will only show that your excess was cleared out.

I sent in 2019 by mail with check and filed 2020 in TurboTax, my 2020 has been accepted (just showed that the carryover was cleared out) but the 2019 has not been received nor check deposited.

Edit : ha! 7 weeks later, the IRS deposited my check just yesterday it turns out.
Katietsu
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Re: Excess 2018 Traditional IRA contribution

Post by Katietsu »

Doc7 wrote: Fri Apr 30, 2021 5:42 pm
Ani wrote: Fri Apr 30, 2021 5:34 pm Thank you.

Not sure if I must go back and amend the 2018 tax return or I should just amend and report it all on the 2020 tax return.
You need to amend 2018 and send a check.
Amend 2019 and send a check.
2020 and send a check.

This assumes that you contributed each year. If you didn’t contribute in 19 or 20, the amended return will show that the carryover was cleared out and no excess check required, your amended return in that case will only show that your excess was cleared out.

I sent in 2019 by mail with check and filed 2020 in TurboTax, my 2020 has been accepted (just showed that the carryover was cleared out) but the 2019 has not been received nor check deposited.

Edit : ha! 7 weeks later, the IRS deposited my check just yesterday it turns out.
Yes, to the each year with a check. Please read the instructions for Form 5329 Part 3. You will see how the amount carries over to the next year.
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Thank you
What additional forms did you use to amend.

1099r and form 5329?
Katietsu
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Re: Excess 2018 Traditional IRA contribution

Post by Katietsu »

neurosphere wrote: Fri Apr 30, 2021 4:58 pm My skimming suggests excess contributions not removed by tax filing result in 6% penalty per year, whether deducted or not. Earnings removed are subject to income tax and an 10% early withdrawal penalty.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
In the OP’s case, you do not want to withdraw earnings. The quoted paragraph is relevant if withdrawing the excess contribution plus earnings within the time period to avoid the 6% penalty. The OP is obviously well past that time period. Instead, the OP will need to pay the 6% penalty for each year. However, they will get to leave the earnings in the IRA.

Sometimes an excess contribution is discovered in time to remove penalty free. But, the earnings are so great, that the better choice is to wait to remove the excess contribution. Pay the 6% penalty. But get to leave the earnings in the IRA avoiding current income tax and a 10% early withdrawal penalties on earnings.
cas
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Re: Excess 2018 Traditional IRA contribution

Post by cas »

OP, can you clarify why you think the $5500 is an excess contribution?

(Situation 1) Making a $5500 contribution (2018) and deducting it when your income is too high is not an excess contribution. You do have to go back and amend your tax return to NOT deduct it (and add the necessary Form 8606 to declare the $5500 in non-deductible basis), but that isn't the same thing as an excess contribution to a tIRA. You can make a contribution to a tIRA at *any* income level; income level affects only whether you can deduct it or not.

(Situation 2) On the other hand, there *is* such a thing as an excess contribution to a tIRA. For example, in 2018 you made a $5500 contribution to a tIRA at custodian #1. Then you forgot about it and,for the same person, later in 2018, made a second $5500 contribution to a tIRA at custodian #2. (For a total of $11,000 in tIRA contributions for 2018 for a single person.)

It isn't clear to me which situation you are asking about.

I think most of the responses you are getting (involving Form 5329) are for Situation 2.
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Katietsu wrote: Fri Apr 30, 2021 6:00 pm
neurosphere wrote: Fri Apr 30, 2021 4:58 pm My skimming suggests excess contributions not removed by tax filing result in 6% penalty per year, whether deducted or not. Earnings removed are subject to income tax and an 10% early withdrawal penalty.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
In the OP’s case, you do not want to withdraw earnings. The quoted paragraph is relevant if withdrawing the excess contribution plus earnings within the time period to avoid the 6% penalty. The OP is obviously well past that time period. Instead, the OP will need to pay the 6% penalty for each year. However, they will get to leave the earnings in the IRA.

Sometimes an excess contribution is discovered in time to remove penalty free. But, the earnings are so great, that the better choice is to wait to remove the excess contribution. Pay the 6% penalty. But get to leave the earnings in the IRA avoiding current income tax and a 10% early withdrawal penalties on earnings.



Hmm... wait till when?

Till 59.5 years age to avoid paying 10% early withdrawal penalty and current income tax on the earnings?
Topic Author
Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

cas wrote: Fri Apr 30, 2021 6:09 pm OP, can you clarify why you think the $5500 is an excess contribution?

(Situation 1) Making a $5500 contribution (2018) and deducting it when your income is too high is not an excess contribution. You do have to go back and amend your tax return to NOT deduct it (and add the necessary Form 8606 to declare the $5500 in non-deductible basis), but that isn't the same thing as an excess contribution to a tIRA. You can make a contribution to a tIRA at *any* income level; income level affects only whether you can deduct it or not.

(Situation 2) On the other hand, there *is* such a thing as an excess contribution to a tIRA. For example, in 2018 you made a $5500 contribution to a tIRA at custodian #1. Then you forgot about it and,for the same person, later in 2018, made a second $5500 contribution to a tIRA at custodian #2. (For a total of $11,000 in tIRA contributions for 2018 for a single person.)

It isn't clear to me which situation you are asking about.

I think most of the responses you are getting (involving Form 5329) are for Situation 2.


Sure,

It's situation number 2.

We made 2017 and 2018 contributions to fidelity and transferred to vanguard.
In 2019, I forgot about this transfer from fidelity and made both 2018 and 2019 contributions.

Wonder why vanguard did not pickup on that in 2019.
Thanks.
Katietsu
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Re: Excess 2018 Traditional IRA contribution

Post by Katietsu »

Ani wrote: Fri Apr 30, 2021 6:11 pm
Katietsu wrote: Fri Apr 30, 2021 6:00 pm
neurosphere wrote: Fri Apr 30, 2021 4:58 pm My skimming suggests excess contributions not removed by tax filing result in 6% penalty per year, whether deducted or not. Earnings removed are subject to income tax and an 10% early withdrawal penalty.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
In the OP’s case, you do not want to withdraw earnings. The quoted paragraph is relevant if withdrawing the excess contribution plus earnings within the time period to avoid the 6% penalty. The OP is obviously well past that time period. Instead, the OP will need to pay the 6% penalty for each year. However, they will get to leave the earnings in the IRA.

Sometimes an excess contribution is discovered in time to remove penalty free. But, the earnings are so great, that the better choice is to wait to remove the excess contribution. Pay the 6% penalty. But get to leave the earnings in the IRA avoiding current income tax and a 10% early withdrawal penalties on earnings.



Hmm... wait till when?

Till 59.5 years age to avoid paying 10% early withdrawal penalty and current income tax on the earnings?
No. The waiting decision with respect to excise tax vs withdrawing earnings does NOT apply to you. And you do NOT need to withdraw earnings. You are already past the point of making a corrective distribution. (That date would have been some time in 2019, depending on details that are not relevant here.). Now that it is 2021, you will be paying the already discussed excise taxes. Leave the earnings in the IRA and there will be no 10% penalty or income tax. If this post was happening in April of 2019 then the discussion would be different.

Though, maybe one of the retirement account gurus can way in. It seems that, if you wanted, you could wait until December to withdraw the excess contribution. The penalty is no greater for removing in December than now and you may be sheltering extra earnings in the IRA.

Bottom line- take the contribution out before the end of the year. Take only the contribution not earnings. Fill out the Form 5329 forms. Pay the excise taxes.
Topic Author
Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

What if nobody discovered this excess contribution and it went unrecognized till I started taking rmds at retirement?

Not sure if I have done myself a favor by discovering this now or just opened a pandora box for no reason.

Vanguard or fidelity didnt pickup on it. My CPAs from 2018 and 2019 certainly failed to pickup on it.

Not that I want to find out the hard way but what's the irs mechanism in my retirement years to discover this one excess IRA contribution made decades ago.
Alan S.
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Re: Excess 2018 Traditional IRA contribution

Post by Alan S. »

Ani wrote: Fri Apr 30, 2021 7:21 pm What if nobody discovered this excess contribution and it went unrecognized till I started taking rmds at retirement?

Not sure if I have done myself a favor by discovering this now or just opened a pandora box for no reason.

Vanguard or fidelity didnt pickup on it. My CPAs from 2018 and 2019 certainly failed to pickup on it.

Not that I want to find out the hard way but what's the irs mechanism in my retirement years to discover this one excess IRA contribution made decades ago.
Every year that passes makes it more unlikely the IRS will uncover an excess contribution. The vast majority of excess contributions are discovered by tax prep software either of a professional or used by the taxpayer. The IRS itself does very little, almost nothing to sniff out excess contributions, despite the fact that they receive enough data to effectively monitor them. They know earned income and AGI from tax returns and they get a 5498 for every contribution that is made. So right now the IRS actually have 5498 forms for 2018 contributions that add up to double the allowed contribution, and there is no 1099R reporting a corrective distribution with earnings or a regular distribution that would have cured the excess.

But there is no statute of limitations for excess IRA contributions, and 6% excise taxes would pile up if the IRS ever did discover this. There just has never been indications that the IRS ever looks back more than a couple years unless they are working on a major tax fraud situation.
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Great point about the 2 form 5498s for 2018.


Thank you all.
cas
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Re: Excess 2018 Traditional IRA contribution

Post by cas »

Ani wrote: Fri Apr 30, 2021 7:21 pm What if nobody discovered this excess contribution and it went unrecognized till I started taking rmds at retirement?
Aside from the Form 5498 being the mechanism...

If you never discovered the forgotten excess contribution and merrily started taking RMDs, then the excess amount would end up being unnecessarily taxed twice. (Once on the way in, because it was never deducted on a Form 1040. And a second time on the way out, because it was never entered on a Form 8606 as non-deductible basis and, therefore, would be treated as a pre-tax contribution when withdrawn via RMD.)

Having the amount be unnecessarily taxed twice is to the disadvantage of the taxpayer (worse than being in a taxable account the whole time) and to the advantage of the US Treasury.

(So, given all the things they could focus on, I'm not sure how much motivation the IRS has to prioritize catching mistaken/forgotten extra tIRA contributions. Outright fraud might be a different matter.)
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neurosphere
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Re: Excess 2018 Traditional IRA contribution

Post by neurosphere »

cas wrote: Sat May 01, 2021 7:51 am (So, given all the things they could focus on, I'm not sure how much motivation the IRS has to prioritize catching mistaken/forgotten extra tIRA contributions. Outright fraud might be a different matter.)
So you're saying that we should all just make excess Roth contributions each year, because that's where the REAL money is. :) Doesn't seem like they scrutinize any IRA contributions at all! :wink:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Katietsu wrote: Fri Apr 30, 2021 6:49 pm
Ani wrote: Fri Apr 30, 2021 6:11 pm
Katietsu wrote: Fri Apr 30, 2021 6:00 pm
neurosphere wrote: Fri Apr 30, 2021 4:58 pm My skimming suggests excess contributions not removed by tax filing result in 6% penalty per year, whether deducted or not. Earnings removed are subject to income tax and an 10% early withdrawal penalty.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
In the OP’s case, you do not want to withdraw earnings. The quoted paragraph is relevant if withdrawing the excess contribution plus earnings within the time period to avoid the 6% penalty. The OP is obviously well past that time period. Instead, the OP will need to pay the 6% penalty for each year. However, they will get to leave the earnings in the IRA.

Sometimes an excess contribution is discovered in time to remove penalty free. But, the earnings are so great, that the better choice is to wait to remove the excess contribution. Pay the 6% penalty. But get to leave the earnings in the IRA avoiding current income tax and a 10% early withdrawal penalties on earnings.



Hmm... wait till when?

Till 59.5 years age to avoid paying 10% early withdrawal penalty and current income tax on the earnings?
No. The waiting decision with respect to excise tax vs withdrawing earnings does NOT apply to you. And you do NOT need to withdraw earnings. You are already past the point of making a corrective distribution. (That date would have been some time in 2019, depending on details that are not relevant here.). Now that it is 2021, you will be paying the already discussed excise taxes. Leave the earnings in the IRA and there will be no 10% penalty or income tax. If this post was happening in April of 2019 then the discussion would be different.

Though, maybe one of the retirement account gurus can way in. It seems that, if you wanted, you could wait until December to withdraw the excess contribution. The penalty is no greater for removing in December than now and you may be sheltering extra earnings in the IRA.

Bottom line- take the contribution out before the end of the year. Take only the contribution not earnings. Fill out the Form 5329 forms. Pay the excise taxes.



I spoke with Vanguard and read the forms.
They confirmed that I do not have to remove the earnings on the excess contribution.

They confirmed that 6% penalty applies on the contribution each year for 2018/2019/2020.

The confusing part is : They also say that the contribution (5550) will need to be included in my regular income, when its removed and will be taxed at my tax rate plus an 10% early withdrawal penalty. This was a nondeductible contribution which has already been taxed. So, not sure if it should be taxed again and if an early withdrawal penalty should apply as I am just correcting an excess contribution.
Katietsu
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Re: Excess 2018 Traditional IRA contribution

Post by Katietsu »

Wow. Vanguard is right. I did not pick up on the non deductible part of the contribution. I wonder if you can apply the excess to the 2021 contribution. I know this is a solution to avoiding the double taxation when this is discovered a year after the excess contribution has been left in the IRA.
Topic Author
Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

thank you. :happy

I already maxed out the 2021 IRA earlier this year. and rolled it out into the roth IRA(backdoor conversion).

I guess I can use the 5500 towards 2022 contribution, this way I wont be taking money out of the IRA and avoid the additional income tax and the 10% withdrawal penalty. ( i understand i still need to pay the 6% penalty for each year).

I was reading the IRS publications and the guidance is confusing regarding removing NON-deductible excess contributions.

I found a somewhat clear explanation on a form from Fidelity--method 2 and method 3 , where they say this does NOT apply to a non-deductible contribution.


https://www.fidelity.com/bin-public/060 ... equest.pdf
cas
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Re: Excess 2018 Traditional IRA contribution

Post by cas »

Katietsu wrote: Mon May 03, 2021 11:05 am Wow. Vanguard is right. I did not pick up on the non deductible part of the contribution. I wonder if you can apply the excess to the 2021 contribution. I know this is a solution to avoiding the double taxation when this is discovered a year after the excess contribution has been left in the IRA.
I'm so used to these discussions being about excess *Roth* contributions that I missed that, too.

However, I think (?) that Ani's wife's tax reporting does have an additional twist for 2021, if the excess $5500 is withdrawn?

In this thread, which seems to be about a similar situation to Ani's, Alan S. reminds the poster that the distribution of the excess contribution will need to be run through Form 8606. (Just like any distribution from a tIRA that contains basis.)

I think this means that the $5500, if Ani has it distributed to him in 2021, will actually be a pro-rata mix of the contents of his wife's tIRA? (In other words, from the Form 5329 perspective, it *will* be the "excess $5500" and its withdrawal will succeed in getting rid of the ongoing 6% penalty on Form 5329. But, from the Form 8606 perspective, it will be a pro-rata mix of the contents of the tIRA, rather than the exact subject-to-double-taxation $5500 excess contribution?)

And, if I understand correctly, his wife's tIRA is a mixture of multiple years of valid non-deductible contributions, multiple years of pre-tax earnings on those contributions, plus the excess $5500 (which is currently in the weird state of being subject to double taxation, because it was neither deducted nor (presumably) reported as basis on the 2018 Form 8606).

So only part of the $5500 distributed in 2021 would be subject to taxation plus 10% penalty (in 2021)? (The pro-rata part of the distribution that ends up being drawn from basis would not be.)

But, in exchange for the whole $5500 not being subject to tax + 10% penalty in 2021, part of the subject-to-double-taxation $5500 would still (pro-rata) be lurking in the tIRA, to be taxed (pro-rata) upon future distributions from the tIRA? (Double taxation = it was already taxed before it became the excess contribution. Then Form 8606 treats it as pre-tax because it was never reported as basis on the 2018 Form 8606. The 10% early withdrawal penalty is yet a third (possible) tax. Whether or not the 10% early withdrawal penalty ever showed up again would depend on when future distributions were taken.)

(The most useful part of this post is that link to Alan S. discussing someone else's similar situation. I'm not knowledgeable enough for any of the rest of what I wrote to be more than speculation.)
Topic Author
Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Thank you.

As far as the 8606 goes--
the instructions state the I dont have the include distributions that are the result of returned excess contribution.



I also realize that I cant just leave the excess 5500$ in my account as of dec 31st 2021 as this is the first year of me performing a backdoor roth ira conversion for both of us.

So, the excess 5500$ has to come out of my wife's account one way or the other. If I can somehow apply it to year 2022 without it being in my wife's account as of dec31st, that would be great.

My only concern is ,will I have to pay the additional income tax(would be double taxation) and the 10% early withdrawal penalty for the excess contribution of 5500$ in 2018 when its removed and reported on 1099R by vanguard.
Alan S.
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Re: Excess 2018 Traditional IRA contribution

Post by Alan S. »

Ani wrote: Mon May 03, 2021 2:15 pm Thank you.

As far as the 8606 goes--
the instructions state the I dont have the include distributions that are the result of returned excess contribution.



I also realize that I cant just leave the excess 5500$ in my account as of dec 31st 2021 as this is the first year of me performing a backdoor roth ira conversion for both of us.

So, the excess 5500$ has to come out of my wife's account one way or the other. If I can somehow apply it to year 2022 without it being in my wife's account as of dec31st, that would be great.

My only concern is ,will I have to pay the additional income tax(would be double taxation) and the 10% early withdrawal penalty for the excess contribution of 5500$ in 2018 when its removed and reported on 1099R by vanguard.
Each one of these situations has it's own set of rules and they vary according to whether your contributions exceeded the contribution limit or not. Now if you had simply made 1 contribution not in excess of the contribution limit and had no earned income and did not deduct it, it could be returned without tax by filing a detailed explanatory statement with your return, and you would not file Form 8606.

However, unfortunately your situation is different because you made two contributions and therefore exceeded the 5500 contribution limit. In this case, the second contribution was not deductible so you would report it on Form 8606 for 2018. But your distribution would be taxed like any other TIRA distribution after the due date because you exceeded the contribution limit of 5500. The 1099R will show the full amount as taxable as usual, but the 8606 used to report the distribution of the excess amount would provide some credit for your IRA basis. In other words, you would have to report the corrective distribution like any other TIRA distribution with basis. Most of the distribution will be subject to tax and penalty.
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Ani
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Re: Excess 2018 Traditional IRA contribution

Post by Ani »

Thank you.

I did report all non-deductible contributions since last couple years, including 2018. I have not included the forgotten excess contribution as basis on the 2018 form 8606. Sounds like you are suggesting to amend it .

following is the paragraph from publication 590-A for contributions withdrawn after due date: Looks like this is the one that applies to my situation

Excess Contributions Withdrawn After Due Date of Return
In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

Total contributions (other than rollover contributions) for 2020 to your IRA weren’t more than $6,000 ($7,000 if you are age 50 or older).

You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.


In that publication, I wish they clarified if they mean ANY of the following conditions or ALL of the following conditions. :confused
Alan S.
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Re: Excess 2018 Traditional IRA contribution

Post by Alan S. »

Ani wrote: Mon May 03, 2021 6:35 pm Thank you.

I did report all non-deductible contributions since last couple years, including 2018. I have not included the forgotten excess contribution as basis on the 2018 form 8606. Sounds like you are suggesting to amend it .

following is the paragraph from publication 590-A for contributions withdrawn after due date: Looks like this is the one that applies to my situation

Excess Contributions Withdrawn After Due Date of Return
In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

Total contributions (other than rollover contributions) for 2020 to your IRA weren’t more than $6,000 ($7,000 if you are age 50 or older).

You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.


In that publication, I wish they clarified if they mean ANY of the following conditions or ALL of the following conditions. :confused
The 8606 instructions were not written to contemplate this odd situation. However, Sec 408(o) seems to provide an answer:

https://www.law.cornell.edu/uscode/text/26/408

Tough to read, but it appears that line 1 of Form 8606 where you would report a year's ND contributions is limited to the contribution limit for that year (5500). Therefore, if the IRS received your 8606 showing 11,000 on line 1, they would likely disallow it. Not allowing any basis credit for such contributions is more incentive to remove the excess. And yes, not allowing the additional basis does result in double taxation over time.
Alan S.
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Re: Excess 2018 Traditional IRA contribution

Post by Alan S. »

Ani wrote: Mon May 03, 2021 6:35 pm Thank you.

I did report all non-deductible contributions since last couple years, including 2018. I have not included the forgotten excess contribution as basis on the 2018 form 8606. Sounds like you are suggesting to amend it .

following is the paragraph from publication 590-A for contributions withdrawn after due date: Looks like this is the one that applies to my situation

Excess Contributions Withdrawn After Due Date of Return
In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

Total contributions (other than rollover contributions) for 2020 to your IRA weren’t more than $6,000 ($7,000 if you are age 50 or older).

You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.


In that publication, I wish they clarified if they mean ANY of the following conditions or ALL of the following conditions. :confused
The 8606 instructions were not written to contemplate this odd situation. However, Sec 408(o) seems to provide an answer:

https://www.law.cornell.edu/uscode/text/26/408

Tough to read, but it appears that line 1 of Form 8606 where you would report a year's ND contributions is limited to the contribution limit for that year (5500). Therefore, if the IRS received your 8606 showing 11,000 on line 1, they would likely disallow it. Not allowing any basis credit for such contributions is more incentive to remove the excess. And yes, not allowing the additional basis does result in double taxation over time.
Topic Author
Ani
Posts: 100
Joined: Wed Aug 22, 2018 10:03 pm

Re: Excess 2018 Traditional IRA contribution

Post by Ani »

:) Thank you for your time :thumbsup
Katietsu
Posts: 4782
Joined: Sun Sep 22, 2013 1:48 am

Re: Excess 2018 Traditional IRA contribution

Post by Katietsu »

Alan S. wrote: Mon May 03, 2021 8:00 pm
Ani wrote: Mon May 03, 2021 6:35 pm Thank you.

I did report all non-deductible contributions since last couple years, including 2018. I have not included the forgotten excess contribution as basis on the 2018 form 8606. Sounds like you are suggesting to amend it .

following is the paragraph from publication 590-A for contributions withdrawn after due date: Looks like this is the one that applies to my situation

Excess Contributions Withdrawn After Due Date of Return
In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

Total contributions (other than rollover contributions) for 2020 to your IRA weren’t more than $6,000 ($7,000 if you are age 50 or older).

You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.


In that publication, I wish they clarified if they mean ANY of the following conditions or ALL of the following conditions. :confused
The 8606 instructions were not written to contemplate this odd situation. However, Sec 408(o) seems to provide an answer:

https://www.law.cornell.edu/uscode/text/26/408

Tough to read, but it appears that line 1 of Form 8606 where you would report a year's ND contributions is limited to the contribution limit for that year (5500). Therefore, if the IRS received your 8606 showing 11,000 on line 1, they would likely disallow it. Not allowing any basis credit for such contributions is more incentive to remove the excess. And yes, not allowing the additional basis does result in double taxation over time.
Could the OP’s wife apply the $5500 to the 2021 contribution and thus avoid the double taxation? As a 2021 contribution, could it be reported as non deductible on the Form 8606 for 2021?
Topic Author
Ani
Posts: 100
Joined: Wed Aug 22, 2018 10:03 pm

Re: Excess 2018 Traditional IRA contribution

Post by Ani »

We have made 2021 contributions earlier this year and rolled it out into a roth IRA.

I guess we could apply the excess 2018 contribution to year 2022, but that would require the 5500 to remain in her account on dec 31st 2021. I am in the process of zeroing out the TIRAs before end of this year for the backdoor IRA conversion.

Looks like the only option is to take the excess amount out this year. Oh well.
At least the 5500 made some gains since 2018, which get to stay there.
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