Carry forward (absorb) nondeductible IRA contribution next year?

[musicprof]

Here's the situation:

I contributed $6000 to my Vanguard IRA in March 2020 (for the 2019 tax year). When I did my taxes, discovered some extra house flipping $ put me over the MAGI, and could only deduct $1500 off my taxes. At the time, I talked with someone from Vanguard who said I could just leave it and count it towards 2020 taxes. Looking at it now, it appears that's not easily possible, especially since I didn't file an 8606 for nondeductible contributions, or pay the 6% excise tax via form 5329.

I've scoured the internet and IRS publications for a situation like this, but can't find a definitive answer. Thoughts?

[secondcor521]

I'm going to take everything you wrote at face value.

Vanguard is an investment company.  They do not and should not give tax advice.  You should rely on a local, qualified tax preparer and not on Vanguard or me for tax advice.

Assuming that you're talking about a $6K contribution to a traditional IRA (very likely), and that you had enough earned income to support the contribution (very likely), and that you mean that you were in the MAGI phase out range for deductibility and were only able to deduct $1500 of that contribution, then:

You do not owe the 6% excise tax because you did not contribute more than the allowable contribution amount into your traditional IRA.  Assuming you're too young for catchup contributions (very likely), your allowable contribution amount is the lesser of $6K or your earned income, so very likely $6K.

You are very likely eligible to deduct whatever fraction of your IRA contribution the tax software or you calculated.  Let's assume it was $1500.

The remaining $4500 (or whatever the actual remainder amount is) of your contribution may stay in your IRA as a nondeductible contribution.  You should have filed a Form 8606 with your 2019 tax return to reflect this nondeductible contribution.

If you have already filed your 2019 tax return (likely), you may file a 2019 Form 8606 by itself.  You may owe a $50 penalty for not filing the form on a timely basis, although the penalty can be waived if you show reasonable cause for failure to file.

Going forward, that $4500 is a bit of a pain in the rear, because it affects the tax impacts of everything going forward that you do with all of your traditional IRAs.  Your future withdrawals and Roth conversions are impacted on a pro-rata basis, and any heirs who inherit any of your IRAs will have their withdrawals impacted.  I'm not sure how to get out of this "milk in the coffee" situation you are now in; perhaps others will chime in with suggestions.

[AccrualWorld]

The remaining $4,500 is non-deductible and would not be applied to 2020.

What you could have done is pulled the $4,500 out or converted the $4,500 amount to a Roth IRA. Not sure what else you can do now that we're in another tax year.

[ixtap]

Did Vanguard actually attribute $1500 to 2019 and the remainder to 2020 or is it all attributed to 2019?

[musicprof]

Did Vanguard actually attribute $1500 to 2019 and the remainder to 2020 or is it all attributed to 2019?

They attributed all $6000 to 2019. I'm going to call them and see if they can change that, but my assumption is no.

[musicprof]

I'm going to take everything you wrote at face value.

Vanguard is an investment company.  They do not and should not give tax advice.  You should rely on a local, qualified tax preparer and not on Vanguard or me for tax advice.

Assuming that you're talking about a $6K contribution to a traditional IRA (very likely), and that you had enough earned income to support the contribution (very likely), and that you mean that you were in the MAGI phase out range for deductibility and were only able to deduct $1500 of that contribution, then:

You do not owe the 6% excise tax because you did not contribute more than the allowable contribution amount into your traditional IRA.  Assuming you're too young for catchup contributions (very likely), your allowable contribution amount is the lesser of $6K or your earned income, so very likely $6K.

You are very likely eligible to deduct whatever fraction of your IRA contribution the tax software or you calculated.  Let's assume it was $1500.

The remaining $4500 (or whatever the actual remainder amount is) of your contribution may stay in your IRA as a nondeductible contribution.  You should have filed a Form 8606 with your 2019 tax return to reflect this nondeductible contribution.

If you have already filed your 2019 tax return (likely), you may file a 2019 Form 8606 by itself.  You may owe a $50 penalty for not filing the form on a timely basis, although the penalty can be waived if you show reasonable cause for failure to file.

Going forward, that $4500 is a bit of a pain in the rear, because it affects the tax impacts of everything going forward that you do with all of your traditional IRAs.  Your future withdrawals and Roth conversions are impacted on a pro-rata basis, and any heirs who inherit any of your IRAs will have their withdrawals impacted.  I'm not sure how to get out of this "milk in the coffee" situation you are now in; perhaps others will chime in with suggestions.

Thanks for your detailed response! I had hoped I could carry it forward like you can with an excess contribution (paying the 6% excise tax of course), but since it isn't technically an excess contribution, it seems not. Unfortunately every "scenario" presented in various IRA tutorials I've read does not cover this situation.