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

Forum|Forum|1 year ago
March 30, 2025
2 replies
23 views

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And for those that want to chime in - I should've included the earnings on the 2023 return since the funds were withdrawn before the due date......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.

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Best answer by TaxGuyBill

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.

T

TaxGuyBill

Level 15

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.

dkhAuthor

Level 15

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

Level 13

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

dkhAuthor

Level 15

@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.

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