1099-R code P creating a circular mess - anyone have experience with this situation

[dkh]

Amending 2023 for 1099-R code P which seems so simple.  The taxable amount (earnings) is reducing the IRA deduction and creating additional tax on F5329.  Should this be happening?  It seems a vicious cycle.  Does the client remove the excess then we go through this process again ?

Am I missing a check box to prevent this ?  

And for those that want to chime in - I should've included the earnings on the 2023 return since the funds were withdrawn before the due date...... yes in a perfect world.    I don't live in a perfect world.

[TaxGuyBill]

I don't understand where the vicious cycle is happening.

If it is reducing the IRA deduction, it wouldn't create more excess contributions.  So maybe you could clarify where the vicious cycle is coming from.

[dkh]

When preparing 2023 return in 2024 - the taxpayers had already contributed $7500 to IRA but only $2370 was allowed (has work retirement plan and high income). He withdrew excess before Apr15 2024.  Now I have 1099R-P showing Distribution of $5608, taxable of $978 for earnings on the excess.  This $978 increased his income thereby reducing amount allowed for IRA contribution from $2370 to $2000.  And a 10% penalty for early withdrawal on the $978 is being charged.

Does the taxpayer have to remove the $370......which of course will have earnings when a 1099R-P is issued which in turn will bring me right back to this same scenario.   

edit:  he had contributed $7000

[rbynaker]

I'm also not following.  Do you mean Roth IRA?  If not, it's not excess, just non-deductible.

[TaxGuyBill · Accepted solution]

I see what you are saying now.

But as Rick said, the IRA contribution is still allowable.  They can contribute the entire $7000 and didn't need to withdraw anything (there was no "excess").  But because of the income and the work-retirement plan, some of the contribution is non-deductible.  It is still allowable to be made, just not deductible.

[dkh]

Traditional IRA.   Just non-deductible not excess (Poor wording on my part )     

I guess I created this awful circular scenario in my head thinking the non-deductible would need to be withdrawn. It's just some basis to track.  No need to withdraw.  The 1099R gives him $370 non-deductible contribution now.    Oh well.

The original withdrawal was done so taxpayer's contribution could become spouse's contribution which was deductible.    

Any way around the 10% penalty on the $978 earnings withdrawal ? 

[TaxGuyBill]

Nothing special to remove the penalty.  Just the usual exceptions.

As a side note, earnings of $978 was pretty good for a $7000 contribution!

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...

[rbynaker]

I'd have to look it up.  I thought SECURE 2.0 removed the penalty but maybe that was only for earnings on corrected excess Roth IRA contributions.

[rbynaker]

#21?

https://www.irs.gov/pub/irs-pdf/i5329.pdf#page=4

[TaxGuyBill]

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@rbynaker wrote:

#21?

https://www.irs.gov/pub/irs-pdf/i5329.pdf#page=4

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Thanks Rick.  I forgot about that. 

[dkh]

@TaxGuyBill @rbynaker    Thank you for the help. 

 I had it stuck in my head that the non-deductible was excess that had to be removed.