I just spend two hours going through IRS Publication 590a, and reading all related question here and in some other places (none matched this question exactly).
Situation: X is over 50 and contributed the maximum of 6500 $ to an Traditional IRA in July 2016, in the assumption of being able to deduct it from taxes. However, it turns out it is a non-deductible contribution, as unexpected higher income brought his AGI over the limit.
There seems not much sense in keeping the money in the Traditional IRA, as it would need to be tracked as a 'non-deductible contribution' forever (form 8606), and any gain from it is taxable anyway. It would be easier to invest the amount in a normal brokerage account, so X prefers to get it back.
Question: Can X withdraw the non-deductible contribution without tax or penalties, if he does so before tax due date (Apr/15 or even extended) the following year (so contribution and withdrawal fall in the same tax year)?
Basically, a clean and complete "Undo"?
According to my (limited) understanding of what I read in the publication, if the withdrawal includes all interest and other income from it, it is tax and penalty free.
[The case in question is about a previously empty Traditional IRA, which avoids complex calculations; simply withdrawing the complete amount currently in it should do it]
Any potential interest will need to be added to the taxable income; the basis should be 'home free' (I understood that losses, if any, can also be deducted from taxable income).
Can anyone confirm this? Did I understand the publication correctly?