Inadvertent After-Tax IRA Contribution
Taxpayer made monthly contributions to a traditional IRA through 2015. When she prepared her tax with Turbo Tax, it (properly) coded the contributions as after-tax and produced a #8606 to record the basis. She did not understand the tax accounting issues this will create at withdrawal and continued these contributions into 2016. I have advised her to stop contributing and to work with her custodian to reverse the 2016 contributions. Is there anything she can do to remove the 2015 contributions (total of $1,200 which is still in cash)?
Permalink Submitted by Alan - IRA critic on Fri, 2016-08-12 18:56
She can have the 2015 contributions returned with allocated earnings no later than 10/15/2016. Any earnings will be taxable on her 2015 return and the earnings would be subject to the penalty. That would result in having to amend the 2015 return. The 2016 contributions can also be returned, but any earnings on these contributions will be taxable in 2016. Another alternative if she qualifies for Roth contributions (income limit is higher than to deduct a TIRA contribution) is to recharacterize both years as Roth contributions. She would still have to amend the 2015 return to eliminate the 8606, but it would eliminate taxation and penalty on earnings since with a recharacterization no distribution is made.