Excess traditional IRA contribution in 2018
In 2018 taxpayer contributes $6,500 to a traditional IRA and takes a deduction on the 2018 tax return. In Jan 2021 taxpayer receives a notice from the IRS that correctly indicates that income was excluded from the tax return and is no longer allowed to make a tax-deductible contribution since the spouse participated in a retirement plan.
Can the funds be withdrawn in 2021? Does it need to be withdrawn with earnings? Is there a 6% excise tax? If they can be withdrawn, what codes should be on form 1099-R?
Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2021-01-07 18:40
This is not an excess contribution so there is no excise tax. But the contribution was not eligible for deduction, thus the tax bill. Unless the taxpayer receives confirmation that a Form 8606 was attached by the IRS reporting a non deductible contribution, the taxpayer should file a stand alone 8606 for 2018 reporting the non deductible contribution. While this will prevent eventual double taxation on the 6500, it will also mean that all future distributions must also be reported on Form 8606 which pro rates the distribution to determine the taxable amount. Again, there can be no corrective distribution taken as the deadline to remove a 2018 contribution has passed. Any distribution taken now will be mostly taxable and reported on Form 8606 per above.