IRA contribution not allowed

[Possi]

I have a new client who contributed to a traditional IRA. He is a new realtor and netted zero income.

All other income is pension and unearned income. So, he is not allowed to contribute to an IRA.

He will take the money out to avoid a penalty, but what will happen when he takes it out, as far as next year? Will he get a 1099R? If so, he will have already paid tax on this money.

I don't know why, but I can't anticipate this.

[Lynn EA USTCP in Louisiana]

Yes, he will get a 1099R for the distribution of excess contribution.  Since the contribution was excess, not deducted, he has 'basis' in that money. By completing 8606 you show his basis in the money and he should pay tax on only the earnings. That's howmI see it; others may chime in with more information. 

[Possi]

Thanks. The 8606 will be next year. Last year, (he wasn't my client) his compensation was $550 and he put $500 in a traditional IRA. The deduction was not taken, it was overlooked. I'm thinking of not fixing it because it's such a small amount, not worth amending. It's a big tax return, and would take so much time to re-do it wouldn't be worth my fee to him.

Thanks again for the quick response.