I contributed $6000 to my traditional IRA account for the tax year 2021 in Feb'21.
Later in the year, I switched jobs, and at my new employer, I started a 401k plan. As I'm participating in an employer-sponsored retirement plan, I cannot deduct the contribution to IRA anymore from the taxable income for the year. Therefore, I want to reverse the $6000 contribution.
My understanding is that I can withdraw the same year contribution before the tax filing deadline i.e April 15, 2202. Along with the original contribution ($6000), any interest/earnings generated has to be withdrawn as well. And I have to show ONLY the interest/earnings as part of gross income while filing taxes and also pay a 10% penalty ONLY on the interest/earning generated and NOT on my original contribution ($6000).
I want to confirm if my understanding is correct so that I can go ahead and perform the distribution. Thank you.
Reference: https://www.irs.gov/instructions/i5329#idm139986644641968 "Line 15"
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If you had an EXCESS contribution, that would be the case. However, your contribution was not excess, it was merely NON-DEDUCTIBLE. Not at all the same thing. You can't do a corrective distribution just because it's non-deductible.
Leave it there and file the Form 8606 to start tracking basis.
You might be able to covert it to a Roth Contribution - check into information about a "back door roth".
Lot's of high earners do them on purpose. Make a non-deductable traditional IRA and right away convert to a roth.
I think it is still ok for 2021 but it is on "Brandon's" hit list in some of the 2022 tax bills under consideration.
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