Contributed To An IRA When I Wasn’t Eligible…………Now What ?

[ownyourfuture]

On Dec. 27th 2016, I contributed $1,500.00 to an existing IRA @ Fidelity. It was a foolish mistake on my part, in that I wasn't aware that you aren’t allowed to contribute when you have no earned income

When I realized my mistake, I contacted Fidelity, & on Jan. 23rd 2017, I received a check for $1,515.90

I also have a large taxable brokerage account at Fidelity. The tax information for that account was finally available today, & just as I started my return, I remembered the IRA screw up, & decided I better check into that first. I spoke to a Fidelity representative earlier today & here's what I found.

I told him that I’ve used TurboTax deluxe since 2001 & that ever since the feature became available, I’ve always downloaded my tax info directly from Fidelity. Since a 1099-R showing the ‘IRA mistake’ is part of my tax info @ Fidelity, I figured when I downloaded that into my return, it would automatically make the necessary adjustments.

According to the representative, this isn't the case. He told me that unless I contact TurboTax directly, I'll be charged whatever my federal tax rate is, on the entire $1,515.90, not the ’Taxable Amount’ of $15.90 shown on the 1099-R

Even worse than that, if the $1,515.90 was somehow added as additional income, it might be enough to put me over the ACA limits & I'd really be screwed.

Fingers crossed & hoping there's a way out of this

 

[RunningBum]

No worries, or at least I think not. I haven't done this specifically for an IRA contribution, but I think it will be handled like Roth recharacterizations.

What you did was a recharacterization. You got your $1500 back, plus what that $1500 you put in earned while it was in the IRA.

When you go through Turbo Tax, go into where they ask you about the EDIT: IRA contribution reported on the 1099-R. TT should ask you if you recharacterized any of that. Say yes, that you recharacterized $1500. TT will adjust as if you did not make the contribution.

I don't know exactly what happens with the $15.90. That should wind up somewhere as regular taxable income.

Give it a try and see if that works.

 

[cathy63]

According to the representative, this isn't the case. He told me that unless I contact TurboTax directly, I'll be charged whatever my federal tax rate is, on the entire $1,515.90, not the ’Taxable Amount’ of $15.90 shown on the 1099-R

That's flat out wrong. If the 1099-R shows $15.50 in box 2a, then that amount will download properly into TurboTax and it will handle it correctly. You can easily verify this by reviewing the downloaded document in TTax and confirming that the numbers on the downloaded 1099-R match the paper/online version you got from Fidelity.

You can further confirm that TTax is putting the right numbers in the right places by looking at your 1040 before you file it. You should see $15.50 on line 15b.

 

[ownyourfuture]

I corrected this:

When I realized my mistake, I contacted Fidelity, & on Jan. 23rd 2018, I received a check for $1,515.90

To this:
When I realized my mistake, I contacted Fidelity, & on Jan. 23rd 2017, I received a check for $1,515.90

I'm hoping both of you caught that before I did. I actually got the check for $1,515.90 on January 3, 2017 not 2018

 

[RE2Boys]

I'm surprised folks trust the download into TurboTax. I tried it a few years ago from T Rowe Price, and I had to go in and make several adjustments to the point that I deleted all TRP data and started over by manual entry so I understood how each item was handled.
Double check everything.
I just had to make quite a few adjustment to my state return as TurboTax does not import all necessary items from Federal.

 

[RunningBum]

I corrected this:

When I realized my mistake, I contacted Fidelity, & on Jan. 23rd 2018, I received a check for $1,515.90

To this:
When I realized my mistake, I contacted Fidelity, & on Jan. 23rd 2017, I received a check for $1,515.90

I'm hoping both of you caught that before I did. I actually got the check for $1,515.90 on January 3, 2017 not 2018

It actually doesn't matter, you could've recharacterized that any time.

 

[ownyourfuture]

No worries, or at least I think not. I haven't done this specifically for an IRA contribution, but I think it will be handled like Roth recharacterizations.

What you did was a recharacterization. You got your $1500 back, plus what that $1500 you put in earned while it was in the IRA.

When you go through Turbo Tax, go into where they ask you about the Roth contribution reported on the 1099-R. TT should ask you if you recharacterized any of that. Say yes, that you recharacterized $1500. TT will adjust as if you did not make the contribution.

I don't know exactly what happens with the $15.90. That should wind up somewhere as regular taxable income.

Give it a try and see if that works.

Thanks for your help. I'm going to do the return tomorrow, I'll let you know how it turns out.

 

[ownyourfuture]

That's flat out wrong. If the 1099-R shows $15.50 in box 2a, then that amount will download properly into TurboTax and it will handle it correctly. You can easily verify this by reviewing the downloaded document in TTax and confirming that the numbers on the downloaded 1099-R match the paper/online version you got from Fidelity.

You can further confirm that TTax is putting the right numbers in the right places by looking at your 1040 before you file it. You should see $15.50 on line 15b.

It does show the correct amount of $15.90 in box 2a.
I'll do my taxes tomorrow & report how it works out at that time.

Thanks for your help!

 

[gauss]

What is the box 7 code on the 1099-R and is the taxable amount not determined box checked?

BTW, I am not familiar with the language that TT uses in the software, but the IRS would NOT refer to this as a recharacterization. This is assuming that your box 7 code is '8' aka "Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2017".

-gauss

 

[kaneohe]

No worries, or at least I think not. I haven't done this specifically for an IRA contribution, but I think it will be handled like Roth recharacterizations.

What you did was a recharacterization. You got your $1500 back, plus what that $1500 you put in earned while it was in the IRA.

When you go through Turbo Tax, go into where they ask you about the EDIT: IRA contribution reported on the 1099-R. TT should ask you if you recharacterized any of that. Say yes, that you recharacterized $1500. TT will adjust as if you did not make the contribution.

I don't know exactly what happens with the $15.90. That should wind up somewhere as regular taxable income.

Give it a try and see if that works.

This is a somewhat unconventional use of the term "recharacterization". Usually it means changing aTIRA contribution to a Roth or the reverse.
I'm more used to seeing it called removal of an excess contribution (along w/associated earnings). The earnings , I believe, end up as an IRA withdrawal on line 15a/b and they also get a 10% penalty from F5329 and line 59 of the 1040.

 

[RunningBum]

Looks like my mistake calling it a recharacterization. I'll back out and watch.

 

[SecondCor521]

This is a somewhat unconventional use of the term "recharacterization". Usually it means changing aTIRA contribution to a Roth or the reverse.
I'm more used to seeing it called removal of an excess contribution (along w/associated earnings). The earnings , I believe, end up as an IRA withdrawal on line 15a/b and they also get a 10% penalty from F5329 and line 59 of the 1040.

+1. This is my understanding also. The 10% penalty assumes the OP is under 59.5, which s/he probably is.

 

[ownyourfuture]

Update:
I said I was going to wait till tomorrow, but I started the return tonight & it ‘appears’ everything worked out. cathy63 pointed out that I should see $15.90 on line 15b, & It shows $16.00 (rounded up)

As far as I know, I never had to go through/do any recharacterizations as mentioned by RunningBum ?

The return came out as I had expected, actually a little better.
But I have a new problem.

At one point during the return, I was asked about the cost basis of something that happened on July 20th 2017. It was related to my investment in Kinder Morgan (KMI) This is a pipeline company that changed from an MLP, to a conventional stock approximately 3 years ago. I never sold any shares, but for some reason last July 20th, I received a liquidation payout of $13.30

Since all my other tax info downloaded correctly, & apparently nothing showed up, I figured it was one of those situations where you just have to put in a number & hope for the best. So I put in something like $24.27

But later I went back to Fidelity & downloaded a PDF of all the tax information, & it shows a cost basis of zero.

Now I've been trying to go back & change it to zero in TT, but I haven't been able to. If someone could point out how to get to that point/form, it would be much appreciated.

 

[Perryinva]

UMM, you do know that you CAN contribute to an IRA without any earned income (up to a limit for tax deferred and anither limit for non tax deferred) . Only a Roth IRA (or 401k) requires earned income.

 

[RunningBum]

Update:
I said I was going to wait till tomorrow, but I started the return tonight & it ‘appears’ everything worked out. cathy63 pointed out that I should see $15.90 on line 15b, & It shows $16.00 (rounded up)

As far as I know, I never had to go through/do any recharacterizations as mentioned by RunningBum ?

As others pointed out and I acknowledged, I was wrong about that, so disregard what I posted.

 

[gauss]

UMM, you do know that you CAN contribute to an IRA without any earned income (up to a limit for tax deferred and anither limit for non tax deferred) . Only a Roth IRA (or 401k) requires earned income.

This doesn't sound familiar. Do you have a source for this?

I am planning on HSA contributions only after DW REs this year due to a lack of earned income. There is no Earned Income requirement for HSA contributions -- only coverage by a HDHP.

Here is an excerpt from Pub 590-A regarding this.

General Limit

For 2016, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

$5,500 ($6,500 if you are age 50 or older), or
Your taxable compensation (defined earlier) for the year.
Note.

This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See Nondeductible Contributions , later.) Qualified reservist repayments do not affect this limit.

-gauss

 

[pb4uski]

+1 I think Perryinva is mistaken.

For 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than:

• $5,500 ($6,500 if you’re age 50 or older), or
• your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit does not apply to:

• Rollover contributions
• Qualified reservist repayments

(emphasis added)

The only exception that I can think of is spousal contributions, but those still require earned income in excess of total contributions by the other spouse.. IOW, if 50 or older and one spouse had $13,000 in earned income and the other spouse has $0, then each spouse can contribute $6,500 to an IRA.

 

[cathy63]

At one point during the return, I was asked about the cost basis of something that happened on July 20th 2017. It was related to my investment in Kinder Morgan (KMI) This is a pipeline company that changed from an MLP, to a conventional stock approximately 3 years ago. I never sold any shares, but for some reason last July 20th, I received a liquidation payout of $13.30

Since all my other tax info downloaded correctly, & apparently nothing showed up, I figured it was one of those situations where you just have to put in a number & hope for the best. So I put in something like $24.27

But later I went back to Fidelity & downloaded a PDF of all the tax information, & it shows a cost basis of zero.

Now I've been trying to go back & change it to zero in TT, but I haven't been able to. If someone could point out how to get to that point/form, it would be much appreciated.

There are two ways to adjust the cost basis:
Through the Interview UI

1. Select Federal Taxes / Wages & Income / I'll Choose What I Work On
2. Scroll down to Investment Income / Stocks, Mutual Funds, Bonds, Other and click Update
3. Click the Edit button next to the 1099-B that has your transaction
4. Click Continue to go past the payer name screen
5. Locate the transaction that needs adjusting and click Edit
6. Change box 1e to 0 and click Done

Use Forms Mode

1. Press Ctrl+2 or Cmd+2 to switch to Forms
2. Scroll down in the left nav to find the 1099-B in question and click on it
3. If you have more than 2 transactions, use the scrollbar that is on the form itself, not the one in the right nav, to locate the transaction
4. Change the Cost or other basis to 0, it saves automatically
5. Ctrl+1 or Cmd+1 to go back to Interview Mode

 

[gauss]

There are two ways to adjust the cost basis:
Through the Interview UI

1. Select Federal Taxes / Wages & Income / I'll Choose What I Work On
2. Scroll down to Investment Income / Stocks, Mutual Funds, Bonds, Other and click Update
3. Click the Edit button next to the 1099-B that has your transaction
4. Click Continue to go past the payer name screen
5. Locate the transaction that needs adjusting and click Edit
6. Change box 1e to 0 and click Done

Use Forms Mode

1. Press Ctrl+2 or Cmd+2 to switch to Forms
2. Scroll down in the left nav to find the 1099-B in question and click on it
3. If you have more than 2 transactions, use the scrollbar that is on the form itself, not the one in the right nav, to locate the transaction
4. Change the Cost or other basis to 0, it saves automatically
5. Ctrl+1 or Cmd+1 to go back to Interview Mode

Mmm... Again I am not a TT user but I would be surprised if the way to process OP's 1099-R apparent excessive IRA contribution, would be in the 1099-B section of TT.

-gauss
IRS Certified Volunteer Tax Preparer

 

[ownyourfuture]

Mmm... Again I am not a TT user but I would be surprised if the way to process OP's 1099-R apparent excessive IRA contribution, would be in the 1099-B section of TT.

-gauss
IRS Certified Volunteer Tax Preparer

That was for a completely different issue that I found 'after' the excessive IRA contribution issue was settled.

But as long as you're here....................

What is the box 7 code on the 1099-R and is the taxable amount not determined box checked?

The code shown is P1 & the box you mentioned ‘is not’ checked. The correct amount of $15.90 is shown in box 2a

 

[ownyourfuture]

There are two ways to adjust the cost basis:
Through the Interview UI

1. Select Federal Taxes / Wages & Income / I'll Choose What I Work On
2. Scroll down to Investment Income / Stocks, Mutual Funds, Bonds, Other and click Update
3. Click the Edit button next to the 1099-B that has your transaction
4. Click Continue to go past the payer name screen
5. Locate the transaction that needs adjusting and click Edit
6. Change box 1e to 0 and click Done

Use Forms Mode

1. Press Ctrl+2 or Cmd+2 to switch to Forms
2. Scroll down in the left nav to find the 1099-B in question and click on it
3. If you have more than 2 transactions, use the scrollbar that is on the form itself, not the one in the right nav, to locate the transaction
4. Change the Cost or other basis to 0, it saves automatically
5. Ctrl+1 or Cmd+1 to go back to Interview Mode

Cathy:
I thought I had a pretty good understanding of TurboTax, but you're at a completely different level. I've already copied those steps & pasted them in a special file titled TurboTax Tips.
I've went back & made changes on my own in the past, but was only successful after much profanity, & hair pulling. When time allows, I'm going to experiment doing a hypothetical return, just to learn TT in more detail.

My sincere thanks!



As for the debate relating to whether or not you can contribute to a conventional/roth IRA without earned income.

The first IRA eligibility consideration is income. You must earn money to open any IRA. If your only income is from unearned sources, such as investments, you cannot contribute to an IRA. You must get paid wages, a salary, tips, professional fees or bonuses. Mar 16, 2017

But there are certain exceptions:
https://www.forbes.com/sites/advisor/2011/05/31/4-ways-to-make-ira-contributions-without-a-job/#665f64686ed7

 

[gauss]

That was for a completely different issue that I found 'after' the excessive IRA contribution issue was settled.

But as long as you're here....................

What is the box 7 code on the 1099-R and is the taxable amount not determined box checked?

The code shown is P1 & the box you mentioned ‘is not’ checked. The correct amount of $15.90 is shown in box 2a

Then it all sounds good!

Thanks

-gauss

 

[Perryinva]

You all are correct, I WAS thinking of non employed spousal IRA deferred contributions, which both deductible and non deductible amounts are indeed tied to our MFJ total earned income. I was sure only the deductible IRA amount was tied to earned income, not the non deductible IRA. Apparently , I am incorrect.