IRS IRA Help!

[Horn_Spanker 524]

Since both of us are over 50, we each contributed the max of $7k toward a tradition IRA to offset owed income tax.  I just found out that $6,260 of the wife's won't offset because she has a pension plan at here work.  Is there a way to amend her 2019 contribution to $740 and put the $6,260 back in our normal account?

[Horn_Spanker 524]

Or, for the next few years can we deduct off that unused balance?

[StruggleBus 3922]

Rule of thumb on taxes: don't pay them unless you get a letter saying you're going to jail

[TwiceHorn 31582]

17 minutes ago, Horn_Spanker said:

Since both of us are over 50, we each contributed the max of $7k toward a tradition IRA to offset owed income tax.  I just found out that $6,260 of the wife's won't offset because she has a pension plan at here work.  Is there a way to amend her 2019 contribution to $740 and put the $6,260 back in our normal account?

File an amended return.  Pull the excess contribution out.

The problem may be that the institution gives you a 1099R, which will show it as a early retirement distribution subject to tax and 10% penalty.

But if you pay tax on it via your amended return, you should be ok.

Might even be able to explain it to the institution and avoid the 1099R.

[TwiceHorn 31582]

There's actually an answer, and there's a 6% tax due on excess contributions:

If you discover the excess contribution before you file your tax return, you won't have to pay the excise tax if you withdraw the contribution and income earned on the excess contribution. The transaction must be completed by the date – including extensions – your return is due. The withdrawn contribution doesn't need to be reported as income, but you must include any withdrawn investment growth or income as part of your gross income. It will be considered an IRA distribution, which means you'll have to pay a 10 percent tax penalty on the amount as an early withdrawal if you're younger than 59 1/2.

This is a pretty major fuckup.  It's not huge in gross terms, but in terms of maximizing investments, the 6 and 10% hits are hardcore.

You can credit it toward future years' contributions. https://budgeting.thenest.com/happens-over-contribute-ira-20551.html

Edited July 10, 2020 by TwiceHorn

[NeverMarryAStripper 21964]

If he gets a 1099R and pays the tax and penalty in the year of withdrawal thee wouldn't be any need to file an amended return.

[TwiceHorn 31582]

Yeah, I was thinking he might be able to undo it altogether, but apparently not.

IGNORE POST 4, IT IS WRONG.

[Horn_Spanker 524]

Is that "excess contribution" an excess of the amount allowed ($7k in my case) or and excess of what I needed to contribute to offset taxes?  I interpret it as excess of the $7k.

So, take a penalty today or pay income taxes in the future?  Why do today what you can put off into the future?  So, I'll leave it alone and mark it a lesson learned.

 

 

[kmac30 416]

Why exactly is it considered overfunded? Why don’t you just leave it in as a nondeductible IRA contribution?

 

You can have a pension at work and still put money in an IRA.

 

Also, when did you make the contribution? If in 2020, can your institution just change the year of the contribution?

 

*edit* when I say nondeductible I’m referring to the amount over what you can deduct(740 I believe)

[Horn_Spanker 524]

1 minute ago, kmac30 said:

Why exactly is it considered overfunded? Why don’t you just leave it in as a nondeductible IRA contribution?

 

You can have a pension at work and still put money in an IRA.

 

Also, when did you make the contribution? If in 2020, can your institution just change the year of the contribution?

 

*edit* when I say nondeductible I’m referring to the amount over what you can deduct(740 I believe)

My goal was to contribute only what was needed to offset owed income tax since I was funding it with aftertax money.  Yes, it is now a nondeductible contribution, but I'll be double taxed on the funds.  When I earned them, and in the future when I take out the IRA.  Credit union will call me back Monday with their opinion.

[kmac30 416]

No, you’ll now have a basis in your IRA so the 6k and change will not be taxed twice. It’s tracked with Form 8606.

Your CPA or even turbo tax (i think), can handle this.

[Horn_Spanker 524]

13 minutes ago, kmac30 said:

No, you’ll now have a basis in your IRA so the 6k and change will not be taxed twice. It’s tracked with Form 8606.

Your CPA or even turbo tax (i think), can handle this.

So, I'm OK as long as I don't mind having the $6k sit until I'm at least 70.5?

[Dbeasy 15110]

So, I'm OK as long as I don't mind having the $6k sit until I'm at least 70.5?

There is no double taxation because whatever you contributed after tax will be subtracted from your ira basis. You can start pulling it out at 59 1/2. Do that. It’s fine.

[Reagan1k 3024]

Haven’t thought this through but you may be able to reclassify that portion of the contribution as a Roth IRA contribution and have the custodian move it to a separate Roth account, pay the tax on an amended return, and then you’ll have a Roth going forward.  Much easier to track, and can continue to make proper deductible contributions to the  traditional IRA As allowed and excess to the Roth. 

[woohorn 1131]

Not eligible for trad ira, not eligible for roth.

Whoever said nondeductible is correct, but you'll need to amend.

[kmac30 416]

Haven’t thought this through but you may be able to reclassify that portion of the contribution as a Roth IRA contribution and have the custodian move it to a separate Roth account, pay the tax on an amended return, and then you’ll have a Roth going forward.  Much easier to track, and can continue to make proper deductible contributions to the  traditional IRA As allowed and excess to the Roth. 

He could convert to Roth, but IRS considers all IRA money in a conversion, so some of it will be taxable, and that’s assuming an IRA account didn’t exist before this. 100k in IRA, convert the 6k, 6% isn’t taxed, rest is.

[kmac30 416]

Not eligible for trad ira, not eligible for roth.

 

Whoever said nondeductible is correct, but you'll need to amend.

Other poster is right, it’s a conversion. Not eligible for deduction put it in and convert. Backdoor Roth.

 

*sorry, you’re right. I thought other poster was saying convert, but he said reclassify. No dice on that.

[52-80 19271]

Backdoor Roth sounds like a kinky Jewish family

[Brew 3049]

The nondeductible part is basically a nondeductible IRA contribution and should be reported that way on your tax return. You can withdraw it at any point tax/penalty free as it is a return of basis just like a Roth. If you made them in 2020 for 2019 it will not create any issues, just withdraw it. If she has no other IRA’s you can roll them to a Roth as a back door Roth contribution as mentioned above.

[Reagan1k 3024]

9 hours ago, kmac30 said:

He could convert to Roth, but IRS considers all IRA money in a conversion, so some of it will be taxable, and that’s assuming an IRA account didn’t exist before this. 100k in IRA, convert the 6k, 6% isn’t taxed, rest is.

Yep- I hadn’t considered the situation if they had existing IRA balances and the pro-rated tax. 

[woohorn 1131]

Think backdoor roth is method to get around roth income limits.

Prob here is the "coverage under other retirement plan" limitation that should also preclude any type of roth (inc backdoor iirc).

[Bevo 13601]

Maybe a new band name, "Backdoor Roth".

[CooterBrown 18033]

Maybe a new band name, "Backdoor Roth".

South Austin’s mom has trademarked Backdoor Ruth. You may get sued.

[Judge Roybeanbag 11821]

14 hours ago, 52-80 said:

Backdoor Roth sounds like a kinky Jewish family  retired Van Halen song.

Fify.

[Judge Roybeanbag 11821]

Ya know all my contributions are guaranteed qualified... 

[Brew 3049]

10 hours ago, woohorn said:

Think backdoor roth is method to get around roth income limits.

Prob here is the "coverage under other retirement plan" limitation that should also preclude any type of roth (inc backdoor iirc).

Backdoor Roth can be made with other retirement plans in place. Make a nondeductible traditional, convert it to a Roth (assuming no other traditional balances), you have a backdoor Roth even if you participate in company retirement plans.

His specific issue is that his income is too high to make a traditional deductible contribution if either are eligible for company retirement plans. Classify it as nondeductible or withdraw it.