How to deal with an incorrect IRA Basis and Value from the previous year?

Question

I started my Traditional IRA account back in 2023. During that year I contributed $3.5K, all the funds were non-deductible due to my AGI.

Unfortunately, I made a mistake in my 2023's 8606 form and specified only $3K of non-deductible contributions. I bought $500 of FMSDX and didn't realize that Fidelity doesn't show money invested in stock market as a part of Traditional IRA "balance". I found this mistake only today filing my 2024 taxes.

In February 2024, I contributed additional $3K to my Traditional IRA account for the prior year (2023). In December 2024, I maxed out my Traditional IRA contributions by adding another $7K and did a full backdoor roll over to a Roth IRA account.

Currently, I am trying to do my 2024 taxes. I've read through the existing article (https://community.freetaxusa.com/kb/articles/60-how-do-i-report-a-backdoor-roth) but still have a couple of questions about my 1099-R:

1/ Can I correct my 2023 basis in my 2024 tax returns?

In other words, can I put $3.5K as my 2023's IRA Basis and Value despite of

"Based on the Form 8606 that you filed in 2023, your total basis for 2023 and earlier years is $3,000."

message from FreeTaxUSA? Or filing a 2023 tax amendment is a must in this case?

2/ How do I factor in my additional $3.5 that I contributed in 2024 for the prior year (2023)?

If simply include them into my 2023 IRA basis, I do get my taxes calculated correctly. But I am concerned if that's the right way to do things.

PhillipB · Answer

Hello,

Answer for Q1: Yes, the instructions to Form 8606 only require an amendment in cases of changing a nondeductible IRA into a deductible IRA, or in the case of needing correct an overstated nondeductible contribution. Since you are correcting an understated nondeductible contribution, there should be no need for amending the return. Generally amended returns are only needed if there is an effect on the taxes paid or the refund received from the original return.

Answer for Q2: I would simply include it in the basis figure that you report for the 2024 Form 8606.

The IRS may send a letter asking you to explain the differences, but all you would need to do is explain that you miss entered the nondeductible contribution on your 2023 because your broker had an incorrect figure for your IRA statements when you prepared your return. You would also respond to any IRS letters with copies of your IRA statements that show the full amount of 3,500 dollars for your 2023 nondeductible contributions.

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