Removing Post-Tax Traditional IRA Contribution as Taxable Income when doing an Excess Contribution Removal

Forum|Forum|1 year ago
March 10, 2025
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Hello,

I funded a Traditional IRA in late 2024 with a financial institution in the amount of $7000, but soon withdrew it as an excess contribution as I decided to leave said financial institution. This $7000 contribution was made with post-tax dollars and was never deducted from income.

By time I made the withdrawal, I lost about $6, so the distribution was for $6994. On my 1099-R, the $6,994 is showing as taxable. However, it SHOULD NOT BE as this was funded with after-tax funds and was never deductible.

TurboTax of course kept adding this $6994 to my income, which is not correct. I see of no way to remedy this besides changing Box 2a Taxable Amount of the 1099-R to $0.

Is this the right way to handle this?

I subsequently funded a Traditional IRA after all of this was completed at another financial firm, and did a same-day Roth Conversion of those funds. This is all correct in TurboTax, but the original withdrawal as excess contribution with the "old" financial firm has no way I can see to change the Taxable Amount to $0.

Best answer by DavidD66

Did you enter your IRA contribution that you removed as an excess contribution? If you didn't report a non-deductible contribution the program won't know that you had any basis in your IRA. If you didn't report the contribution, you need to do so. Once you report a non-deductible contribution of $7,000, your withdrawal of excess contribution should no longer be showing as taxable.

DavidD66Answer

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s_chi29Author

This actually did not resolve the issue. Here is what I did. Note all of these transactions were done with AFTER-TAX dollars and at no point was any of this going to be deductible. These are all non-deductible transactions as my MGI is too high:

Nov 2024: Funded Traditional IRA with $7,000 at Bank A.

Nov 2024: Removed above as excess contribution ($6,994, as the account lost some value) from Bank A, as I am going to move to a new financial institution. Transferred these funds to Bank B.

Dec 2024: Funded Traditional IRA with $7,000 at Bank B.

Dec 2024: Immediately converted the Traditional IRA at Bank B to Roth IRA at Bank B.

The 1099-R from Bank A is showing the $6,994 as a Taxable Amount in Box 2a. There is simply no way to get this excluded out of my taxable income that I can see - I've done everything that I can do. The only way to exclude that $6,994 is to replace Box 2a on the 1099-R with $0.

s_chi29Author

It seems the best thing to do is simply delete the 1099-R I received from Bank A. That of course removes the taxable income that I cannot seem to get TurboTax to handle properly, and this funding/withdrawal as excess contribution was a completely non-taxable event. However, I am concerned that this 1099-R from Bank A is furnished to the IRS. I of course have the paperwork of what I did at Bank A in case it is needed.

In the end, I have a $0 basis in my Traditional IRAs on 12/31/24, and I have a $7,000 Non-Deductible IRA Contribution on Form 8606 made in 2024.