EXCESS NON DEDUCTIBLE TIRA CONTRIBUTION ON FORM 8606
Hello:
I have a question about filling out Form 8606 with an excess contribution. I have a client (under 50) who contributed $6500 to her TIRA and converted it to a Roth. So far so good! Then on 12/28/23 she made another $539 contribution to her TIRA. This was converted to a Roth in Feb 2024. So should the Form 8606 Line 1 have the contribution of $6500 (max allowable contribution) or the actual contribution of $7,039? Since she had a balance at 12/31/23 of $541 ($539 + interest) there will be some taxes paid on the conversion. Obviously, including the additional contribution will help, but I don’t know if an excess nondeductible contribution increases basis or is disallowed for basis calculation.
What I can’t find in my research is if line 1 includes all contributions, including excess, or only the allowable contributions ($6,500).
Thanks in advance!
Permalink Submitted by Alan - IRA critic on Sat, 2024-04-06 01:55
Normally, the taxpayer would remove the excess contribution and related earnings by the due date, and if so the Form 8606 instructions indicate to not include the excess on line 1. But if this client converted their entire TIRA value to Roth, the excess contribution will have to be removed from the Roth IRA by the due date, and the situation explained to the Roth custodian. This is a mess and the Roth custodian may not know how to handle it.
Therefore, it will probably be easier to NOT attempt an excess correction from the Roth IRA, but to file Form 5329 and pay the 6% excise tax with the 2023 return. Do not show the excess on line 1 of the 2023 8606. Then contribute less for 2024 so that the excess can be “absorbed” (carried forward) to 2024 and deducted in 2024 (if eligible). This eliminates having to deal with the IRA custodians, and is all handled on Form 5329 for 2023 and 2024, with the 2024 form showing that the excess was eliminated by absorbing as a 2024 contribution.
Permalink Submitted by CT on Sat, 2024-04-06 03:52
Thanks! I have a follow-up question on the $6,500 conversion. If I understand correctly, line 1 will show the $6,500, and then line 6 (end-of-year IRA balances) will be $541 (the excess contribution). So even though we can’t show the excess contribution on line 1, we still have to report it as a TIRA value for 12/31/23, effectively increasing the taxable amount of the conversion. Or does the excess contribution not count in both lines? I have a feeling it’s the former, but I want to ask.
Oh, and I agree with you that the 5329 should be used to correct the error in 2024. Paying the excise tax for 2023 and not dealing with the custodians is a bargain.
Permalink Submitted by Alan - IRA critic on Sat, 2024-04-06 16:19
Yes, the 541 will have to be shown on line 6.
I have reconsidered the line 1 amount, as the 8606 Inst do not clarify how to deal with a later year absorption of an excess contribution, and do not indicate that the excess contribution should be omitted from line 1. Therefore, if you enter 7,039 on line 1 the conversion will be non taxable, and 539 should end up on line 14, then to be carried forward to line 2 of the 2024 8606.
If the 2024 contribution max of 7000 is reduced by 539 to absorb the excess, a contribution up to 6,461 would result in the excess from 2023 being absorbed in 2024, and the 2024 conversions would be almost entirely non taxable.