Erronous Contributions

Submitted by Joseph Hughart on Tue, 2015-08-18 21:05

I made a contribution for my spouse and when I prepared the return discovered that my income was too high and the fact that I was in a pension plan that I was precluded from making a deductible IRA for my spouse. Since the contribution was made on or before 4/15/15 and my return is being filed on or about 9/1/15, I can not figure out how to withdraw the funds. Fidelity says this is a taxable event even though I received no tax benefit with the contribution was made. Any suggestions as to what to do??

Thanks
Joe Hughart



Submitted by Alan - IRA critic on Tue, 2015-08-18 22:41

This was evidently a 2014 contribution, and therefore your 2014 modified AGI will apply. There may be various choices.

  1. Return of contribution – Spouse would request that the IRA custodian return the contribution. IRA custodian would calculate any earnings on the contribution and return the total amount. The earnings would be taxable for the year IN WHICH the contribution was made (2014 or 2015). But the contribution amount itself is NOT taxable. This option must be completed before the return is filed if the contribution was made IN 2014.
  2. Your joint modified AGI is also too high for a Roth contribution so the contribution cannot be recharacterized as a Roth, but if your spouse has no other pre tax IRAs, she could convert the non deductible contribution to a Roth IRA tax free. This is preferable to 3 below.
  3. Just file an 8606 for your wife documenting a non deductible TIRA contribution.

Submitted by [email protected] on Wed, 2015-08-19 13:24

Would #2 also require #3? – m

Submitted by Alan - IRA critic on Wed, 2015-08-19 20:05

Yes, if the contribution is not returned or recharacterized, an 8606 would have to be filed since there will be no deduction allowed. Converting the contribution is a no brainer if the conversion will be non taxable (no other non Roth IRAs), but if there are other IRAs, the conversion may not be beneficial.

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