Roth IRA return of contributions

Submitted by David C on Wed, 2008-11-05 02:22

If I were to take my 2008 Roth contributions ($6,000 for me, $5,000 for my wife) and tell Fidelity that I wanted to do a ‘Return of Contributions’ (see pg #4 [url=http://www.irs.gov/pub/irs-pdf/i8606.pdf]IRS publication 8606 instructions – tax year 2007[/url]



Submitted by Alan Spross on Wed, 2008-11-05 05:07

Yes, you can do this, and where there is a big loss, this is a bona fide way to prop up your current Roth balance. However, before you do this be sure you understand how the earnings allocation is calculated. The calculation reflects the total earnings results of the entire account to which you contributed, not just the results of the contribution itself.

But if you math is correct and the loss is around 25%, then this is worth doing. In your explanation, you do not have to explain WHY you are doing it, just explain that you made a contribution of $6000 on yy/yy/2008 and that you had the contribution returned, which was then worth 4,600 on zz/zz/2008. You do not even have to mention the re contribution.

The end result is that the IRS and you will receive a Forms 5498 and 1099R which will balance out if you do this by year end. If you wait until 2009 to recharacterize, then the final forms will not be issued until January 2010. However, the narrative explanation will be essentially the same.

Even if you told the full story of why you did this, your action is fully allowable by the tax code and the IRS could not reject your action. To restore the value of your Roth balance is a justifiable and wise decision if you can afford the extra dollars.



Submitted by David C on Wed, 2008-11-05 15:27

[quote=”[email protected]“]However, before you do this be sure you understand how the earnings allocation is calculated. The calculation reflects the total earnings results of the entire account to which you contributed, not just the results of the contribution itself.[/quote]

Thank you for your reply. By “entire account” do you mean the aggregate of ALL of our Roth’s – we have them held at three different MF companies – or do you mean in each individual MF IRA account? For example, we have Roth’s w/ Vanguard, Bridgeway and Fidelity. The one w/ Fidelity has only a single year’s contribution to it – for tax-year 2008. So if I am understanding you correctly, in our case the “total earnings” of my “entire account” would be -($1,400) and -($1,200) for my wife. We would not have to consider any of the prior year’s Roth contributions into the calculation since they exist w/ different MF companies.

David



Submitted by Alan Spross on Wed, 2008-11-05 21:15

You have it correct. And when the only contribution made to the account is the one that you are fully withdrawing, there is really no calculation necessary. The earnings are simply the difference between the account balance and the contribution, either positive or negative.

You can ignore the Roth accounts at the other custodians.



Submitted by Rick T on Sat, 2008-11-08 18:11

Hello,
I have a similar situation, except mine was a $5,000 contribution for 2008, and this is my first and only Roth contribution so far (I am 23). My roth IRA has depreciated to $3,000, so I’d love to be able to replenish it with another 2,000!!

Would I still qualify? The reason I ask is that I called the IRS, and the lady told me that once I get a return of contribution, the IRS will see that as 3,000 being returned and will still have me down as contributing 2000 even though there is nothing in my account. So if I went to contribute 5,000, they said they would have me on record as contributing 7,000.

I’m no knowledgeable enough to ask the right questions, so I’m just curious if my situation is different since I have never contributed before this year’s 5,000 contribution, which is now worth 3,000 🙁

Thanks!



Submitted by Alan Spross on Sat, 2008-11-08 21:22

Your situation is basically the same as the prior poster.

The IRS has misinformed you, perhaps they misunderstood your question. If you make sure the IRA custodian codes your distribution as a return of contribution and NOT as a regular withdrawal, the 1099R that is issued the following January will eliminate that contribution and that opens up room for another. Returned contributions are handled just like excess contributons. Also see Pub 590, p 33.

The following is copied from the IRS Regulations for Roth IRAs, Sec 1.408A(3) Q&A #7. Note the second sentence:

>>>>>>>>>>>>>>
Q–7. Does an excise tax apply if an individual exceeds the aggregate regular contribution limits for Roth IRAs?

A–7. Yes. Section 4973 imposes an annual 6-percent excise tax on aggregate amounts contributed to Roth IRAs that exceed the maximum contribution limits described in A–3 of this section. Any contribution that is distributed, together with net income, from a Roth IRA on or before the tax return due date (plus extensions) for the taxable year of the contribution is treated as not contributed. Net income described in the previous sentence is includible in gross income for the taxable year in which the contribution is made. Aggregate excess contributions that are not distributed from a Roth IRA on or before the tax return due date (with extensions) for the taxable year of the contributions are reduced as a deemed Roth IRA contribution for each subsequent taxable year to the extent that the Roth IRA owner does not actually make regular IRA contributions for such years. Section 4973 applies separately to an individual’s Roth IRAs and other types of IRAs.

>>>>>>>>>>>>>>>>



Submitted by Rick T on Sat, 2008-11-08 22:45

Thanks for the quick reply!

I have one last question:

My current contribution is in a TD Ameritrade account. Due to Tradeking’s lower transaction fees, I will be using a TradeKing ROTH IRA when I “replenish” my Roth with 5,000.

So my question is, since the new Roth will be with a different broker, can I make the 5,000 contribution BEFORE my return of contribution for the other one (thereby eliminating as much “out of market” risk as possible), or is it best just to wait until my my return of contribution comes through?

And just to comment on something… something just feels a bit questionable in doing this. Do you think the IRS intended us to use the rules in this way to replenish the ROTH, or is this a loophole they may change soon?

Thanks!



Submitted by Alan Spross on Sat, 2008-11-08 23:55

You can make the new contribution before you request the other to be returned if you wish. There is no need to wait.

You have until next October to remove the first contribution, but the tax reporting is a little easier if you remove it by year end, because the 1099R form in January will be current. Just be careful not to get mixed up and remove the contribution from the wrong account.

THe IRS is very used to people having to correct contributions, due to several reasons such as exceeding the income limit to contribute, mistakenly funding both a full Roth and a full TIRA contribution, failing to indicate when contributions are for a prior year, etc. This same scenario also plays out on Roth conversions, where taxpayers lose money on the conversion and recharacterize it back to the TIRA, so they can reconvert at a later date with better results.

There has been several posts about removing and re contributing the current year contribution since the recent market meltdown, and it is rare to have the market drop by 1/3 over just a few months. Therefore, this is a unique year in the sense that investment results may be causing removal of contributions in more cases vrs removing contributions for other reasons such as income limits, having no earned income, or having excess contributions to be corrected. The IRS and Congress do not consider this a loophole, and there is no talk of changing the contribution rules to eliminate the removal of contributions.



Submitted by Christian Klim on Tue, 2008-11-11 15:46

Given the same marginal tax rate in subsequent years, wouldn’t a more preferable option be to recharacterize the $5000 contributed to the Roth this year as a Traditional IRA to get the $5000 deduction, then on January 1, convert this money to a Roth IRA?

I understand that there are a nunber of factors that would influence which option is preferable:
1) Recharacterize, get tax deduction in current year, Convert to Roth next year
2) Add additional money to Roth IRA in current year

What I’m still having a hard time with is “losing” the ability to tax loss harvest the loss in the Roth IRA. That portion of money you contributed earlier this year is gone forever without a tax benefit to you. If you recharacterize, you at least get a tax benefit immediately, and less taxes (comparing to previous year) having to be paid the next year when you convert. Any thoughts here?



Submitted by Alan Spross on Tue, 2008-11-11 22:23

The difference in the two options is not the taxes paid, but in which account the funds end up.

Assume you have 5,000 in a TIRA, 5,000 in cash and a Roth which has fallen from 5,000 to 3,000 – total of 13,000.

1) Recharacterize contribution to TIRA which moves 3,000 to the TIRA, the convert 5,000 to Roth which restores the original 5,000 in the Roth. You get a 5,000 deduction in one year and pay tax on the 5,000 conversion the next. New balance 3,000 in the TIRA, 5,000 in cash and 5,000 in the Roth.

2) Re contribute after removing contribution. First add 3,000 to cash and then take 5,000 from cash to make new contribution. New balance 5,000 TIRA, 3,000 in cash and 5,000 in the Roth.

Note that the net affect is to have the loss reside in the TIRA in 1), and in cash in 2). Same tax bill.

However, the recharacterization idea assumes both the ability to fully deduct the TIRA contribution AND make a Roth conversion. Many taxpayers cannot do one or the other due to income limits.



Submitted by Chris Klim on Wed, 2008-11-12 00:33

[quote=”[email protected]“]

1) Recharacterize contribution to TIRA which moves 3,000 to the TIRA, the convert 5,000 to Roth which restores the original 5,000 in the Roth. You get a 5,000 deduction in one year and pay tax on the 5,000 conversion the next. New balance 3,000 in the TIRA, 5,000 in cash and 5,000 in the Roth.[/quote]How will you pay tax on $5000 the next year? Isn’t it more likely to be closer to $3000 (unless you have a very quick 40% gain)? What I’m saying here is you pay less in terms of taxes with this approach. Is this thinking flawed?
[quote=”[email protected]“]
Note that the net affect is to have the loss reside in the TIRA in 1), and in cash in 2). Same tax bill.[/quote]I’m not seeing how the tax bill is the same…



Submitted by Alan Spross on Wed, 2008-11-12 02:39

With re contribution – no current tax change. The withdrawal is not taxable and the re contribution is not deductible.

With the recharacterization option – assuming you qualify to deduct the TIRA contribution – you get a deduction for 5,000. Then, when you convert 5,000 to the Roth in order to get the same 5,000 amount into the Roth, you have taxable income of 5,000. The deduction and income offset each other, assuming the same tax rates apply to both.

If you only convert 3,000 to the Roth, then there IS a tax savings, but the Roth is 2,000 short in value. The original poster wanted the benefit of 5,000 working in the Roth going forward. If you are willing to accept less in the Roth, then there is tax break on the difference of 2,000 taxable income.



Submitted by Chris Klim on Wed, 2008-11-12 16:45

[quote=”[email protected]“]With the recharacterization option – assuming you qualify to deduct the TIRA contribution – you get a deduction for 5,000. Then, when you convert 5,000 to the Roth in order to get the same 5,000 amount into the Roth, you have taxable income of 5,000. The deduction and income offset each other, assuming the same tax rates apply to both.
[/quote]If you do qualify for this deduction, does this route make sense? The advantage I see here is that you are basically swapping the TIRA money with the Roth money, so
TIRA: 5000 –> 3000
Roth: 3000 –> 5000
Cash: 5000 (no impact)

In this situation you effectively avoid having to ever pay taxes on the $2000 extra dollars that you were able to get into your Roth IRA.

With the option of withdrawing the contribution for the Roth and refunding $5000 from a taxable account
TIRA: 5000 (no impact)
Roth: 3000 –> 5000
Cash: 5000 –> 3000

In this situtation you get an extra $2000 in your TIRA, but this $2000 will be taxed as ordinary income when you eventually withdraw. Wouldn’t it be better just to keep this $2000 in taxable account and never get taxed on it?*

* I understand that this gets into a similar debate as to whether one should contribute to a non-deductable IRA or use that money to invest in taxable account (if one is not elligble for a Roth or Deductable IRA).

What are your thoughts?



Submitted by Alan Spross on Wed, 2008-11-12 18:09

You’re correct, it does boil down to whether an amount such as the 2,000 in question here is better in a TIRA or a taxable account. The answer to that depends on several unknown potential changes in the tax code, whether the taxpayer wants to have more TIRA funds available to convert over time etc.

A study a couple years ago found that this comes down to a push given current advantageous LT cap gain and qualified dividend tax rates. In the current financial mess, the long term future of both marginal tax rates AND LT cap gain rates appear to be higher, rather than just one of them rising. That would tend to keep the findings of the study valid, ie there is no clear advantage either way.

I would be inclined to look at the current situation. If the taxpayer is cash poor, eg limited emergency fund, opt for the higher cash amount. Or if the taxpayer is already TIRA heavy and future employer rollovers would make that even more so, then also opt for the cash. If the reverse of these indicators is true, then opt for the funds to go to the TIRA.



Submitted by Rick T on Thu, 2008-11-13 12:49

Hello!

Sorry to bug again, but I’d like to make sure this is done right. If I understood you correctly, it would be okay for me to open another Roth for 5,000 (making this year’s contribution 10,000 as of now) as long as I do return of contribution of my first 5,000 deposit, which is now worth only 3000, right (I plan on doing the return before Jan 09)?

My question now is about the form option (from my broker) that I should use to get the return of contributions. There are many options to receive contributions, but I noticed on the form that one option I have is “Return of Excess contribution” where I put the amount and year’s contribution I want returned. Would this be what I select, with the amount of 5,000 (even though the account is worth only 3000 now)? I will also call my broker to clarify.

Thanks so much for your patience and help, I really appreciate it so much! I’m meeting with my tax advisor soon and want to be sure my understanding of this is clear so I can explain it to her 🙂



Submitted by Alan Spross on Thu, 2008-11-13 23:28

Yes, that is what you would select. The return of excess contributions is treated exactly the same as the voluntary return of contributions, so most forms do not bother with the separate option. Just handle it exactly as if it were the return of excess contributions. You would show the original amount of that contribution, not the lower figure. However, the amount that would come OUT would be the lower earnings adjusted figure.



Submitted by Rick T on Fri, 2008-11-14 03:35

Great– thanks so much for your help. I really appreciate your time!



Submitted by Tallah Woykowski on Mon, 2008-11-17 23:35

I have a similar situation for which I was about to post a new topic before stumbling on this exchange. I have a Roth IRA, Rollover IRA and Non-Ded Traditional IRA (“NDTIRA”). I have been above the income limits for Roth IRA contributions for the last few years so I started the NDTIRA with a 2007 contribution in preparation for the 2010 conversion allowance. I made a $5000 NDTIRA contribution for 2008 in January but was laid off in September – a fact that will now put me under the income limits for this year. After reading this exchange, I was considering doing a Return of Contributions from the NDTIRA for the 2008 contributions and instead making the 2008 contribution directly to my Roth. Is this what you would recommend?

Also, if we assume that I will be in a tax bracket that will see increases in the coming years due to the new presidential administration, I wonder if you would also recommend that I convert what is currently held in my NDTIRA and Rollover IRA to Roth assets now, while my income is low enough and my tax bracket stays the same (if I can afford to pay the taxes on this money out of liquid savings, of course). Otherwise, my other option is to wait till 2010 when both the NDTIRA and Rollover IRA account values may be higher and my income may preclude me from doing it until then – right?

Please let me know your thoughts on this and whether I’m overlooking anything. Thanks.



Submitted by Chris Klim on Tue, 2008-11-18 16:25

I would appreciate some advice on this situation as I’m running in circles on the correct steps to take:

1) I contributed $5000 to Roth for 2008 at Fido (Account had other money as well).
2) Mid-year tranfered a majority of Roth from Fido to Wells F. (There is still $50 at Fido, so not all of it is gone)

So, as it stands I currently have a $5000 contribution with Fido and $0 with Wells for 2008.

Questions:
Do I need to do a Return of Excess Contributions with both firms? Or, just Wells as they said they can do the calculation with Fido statements? I talked with a Retirement Operations specialist at Wells and he suggested I tread lightly here since it may look odd to the IRS with a $5000 contribution at different firms.

As I only have less than $50 at Fido, I’m not sure it would make sense to do a Return of Excess Contributions there (but, they will still be reporting a $5000 contribution for 2008 and I guess a small portion of the $5000 contribution is in this $50).

I’ll admit, I’m confused. This was simple for my wife who hadn’t changed firms during the year.



Submitted by Alan Spross on Tue, 2008-11-18 19:21

tallahw,
If your overall financial planning calls for creating more Roth assets as a share of your IRA accounts, then the best option for your contribution is to have it recharacterized as a Roth IRA contribution. Any allocated earnings or losses would be calculated, but you would not ask for a return of contribution, instead just a recharacterization of the original contribution. Before you do this be sure your modified AGI for 2008 will be low enough to permit a full Roth contribution.

I am not sure you realize that all your TIRA accounts are considered as one account containing a dollar amount of non deductible contributions. Therefore, when you convert to a Roth, it does not matter which account funds the conversion as the tax impact is the same. The taxable amount of your conversion is determined on Form 8606 by pro rating the amount of non deductible contributions as a share of total year end values. Because of this, you will get more dollars into the Roth by changing that contribution rather than leaving it in the TIRA and just converting more. The recharacterization of your 2008 contribution is independent of your option to convert all or part of your TIRA to a Roth IRA if you wish. Generally, you would look at your tax brackets and not convert so much in a single year that it inflates your tax bracket back up to what it would have been.

Obviously, take your job situation and the overall financial situation into consideration before making the conversion decision, but the contribution recharacterization is more of a no brainer and deals only with a limited amount. A regular Roth contribution in addition does not have the 5 year holding requirement of a conversion in case you need to withdraw the money in an emergency.



Submitted by Alan Spross on Tue, 2008-11-18 19:54

caklim.
Just to be sure, why are you doing a return of contribution? If you did a transfer to WF of 99% of the balance, why did you leave the $50 there?

You DO have a technical mess as a result of this, and I suspect that if WF is willing to process the request using statements from Fidelity at the time of the original contribution, and at the time of the transfer, plus their own account info, that is the way you should go. Try to get the calculation handled by the specialist you talked to because he seems to be on the right track, and most other staff there are not going to have a clue as to what to do. They you do not have to involve Fidelity about this.

WF would issue the 1099R reporting the return, and Fidelity would report the original contribution, so the IRS will have a match on that and it will not be a problem. The tough part is the earnings calculation that should include both account’s investment experience over the contribution period. WF would not report a contribution because they did not receive one from you. They only received a transfer, and if it was done by direct transfer, it should not be reported by either custodian.



Submitted by Chris Klim on Tue, 2008-11-18 21:03

[quote=”[email protected]“]caklim.
Just to be sure, why are you doing a return of contribution? If you did a transfer to WF of 99% of the balance, why did you leave the $50 there?[/quote]Return of contribution: I’m down 40% for the year. So, I’m trying to get an extra $2000 into my Roth. Turns out I’ll be inelligible to recharacterize the money as a traditional IRA and take the deduction (or at least part of it).

$50 at Fido: I didn’t want to pay the $50 termination fee, so they required me to keep about $50 in the IRA there when I was transferring to Wells. That’s really the only reason. I felt long term it would be a good experiment to see whether my actively managed fund at Fidelity could beat my ETFs/indexes/passively managed funds at Wells. And, it would be with money that I would have otherwise had to use to close out my account.
[quote=”[email protected]“]You DO have a technical mess as a result of this, and I suspect that if WF is willing to process the request using statements from Fidelity at the time of the original contribution, and at the time of the transfer, plus their own account info, that is the way you should go. Try to get the calculation handled by the specialist you talked to because he seems to be on the right track, and most other staff there are not going to have a clue as to what to do. They you do not have to involve Fidelity about this.

WF would issue the 1099R reporting the return, and Fidelity would report the original contribution, so the IRS will have a match on that and it will not be a problem. The tough part is the earnings calculation that should include both account’s investment experience over the contribution period. WF would not report a contribution because they did not receive one from you. They only received a transfer, and if it was done by direct transfer, it should not be reported by either custodian.[/quote]
So,
1) Fidelity would report original $5000 contribution
2) WF would issue 1099R Reporting a $5000 Return
3) WF would report a new $5000 contribution.

Net: The IRS would only see $5000 in contributions for 2008. Is this correct?



Submitted by Alan Spross on Tue, 2008-11-18 21:40

1) Right
2) Yes, but the 1099R would only show the earnings adjusted return, which I assume will be much less than 5,000. The difference is your loss. However, for re contribution purposes you are still credited with a full return of contribution, so that will open up room for another $5,000.
You would explain this to the IRS with an explanatory statement with your 2008 return, eg “I contributed 5,000 to my Roth IRA on xx/xx/2008 for 2008. On yy/yy/2008 I received a full return of that 5,000 contribution, which was then worth $z.”
z will equal the amount shown on the WF 1099R.
3) Right.

Net: First 5,000 contributed was erased by your return of contribution. So the net amount contributed will be the 5,000 from the last contribution, so you will be OK.

Final Note: You avoided the termination fee at Fidelity, but what about a small account fee that most custodians levy on these small accounts each year? You should check into that, even if they give you the option of paying it from outside funds, it is not cost effective.



Submitted by Chris Klim on Tue, 2008-11-18 23:35

[quote=”[email protected]“]1) Right
2) Yes, but the 1099R would only show the earnings adjusted return, which I assume will be much less than 5,000. The difference is your loss. However, for re contribution purposes you are still credited with a full return of contribution, so that will open up room for another $5,000.
You would explain this to the IRS with an explanatory statement with your 2008 return, eg “I contributed 5,000 to my Roth IRA on xx/xx/2008 for 2008. On yy/yy/2008 I received a full return of that 5,000 contribution, which was then worth $z.”
z will equal the amount shown on the WF 1099R.
3) Right.

Net: First 5,000 contributed was erased by your return of contribution. So the net amount contributed will be the 5,000 from the last contribution, so you will be OK.[/quote]Thanks for the thorough explanation. You have been extremely helpful.
[quote=”[email protected]“]Final Note: You avoided the termination fee at Fidelity, but what about a small account fee that most custodians levy on these small accounts each year? You should check into that, even if they give you the option of paying it from outside funds, it is not cost effective.[/quote]They do charge a $12 low balance maintenance fee for any of their own Fido funds that are below $2000. But, since this is one of their non-Fido NTF funds, there is no low balance maintenance fee. Thanks for the heads-up though.



Submitted by Chris Klim on Wed, 2008-11-19 02:35

[quote=”[email protected]“]You would explain this to the IRS with an explanatory statement with your 2008 return, eg “I contributed 5,000 to my Roth IRA on xx/xx/2008 for 2008. On yy/yy/2008 I received a full return of that 5,000 contribution, which was then worth $z.”[/quote]Where would you note this on the 2008 return? Is this a red flag for the IRS?



Submitted by Alan Spross on Wed, 2008-11-19 03:51

It depends on whether you file a paper return or use software.
Various tax programs have places for explanatory statements of various kinds. If you file a paper return, just attach any statements after the regular forms that have a numbered order for attachment.

The IRS instructions for Form 8606 request that these explanations be attached in cases of recharacterizations and excess contribution corrections. It helps that match up the various 1099R and 5498 forms. In addition, since recharacterizations and corrective distributions can take place after the end of the tax year, no one gets a 1099R until the following January, which is the 2nd January after the tax year. So in that case, the IRS does not even have info returns to look at, so the explanatory statement is all they have to go on.



Submitted by Janine Janine on Wed, 2008-11-19 16:16

See my post below….



Submitted by Janine Janine on Wed, 2008-11-19 16:39

“Thanks so much for your patience and help, I really appreciate it so much! I’m meeting with my tax advisor soon and want to be sure my understanding of this is clear so I can explain it to her.”

Your comment made me smile because I find that I am often explaining something to my tax advisor based on information I have gleaned from this website.



Submitted by Rick T on Thu, 2008-12-18 05:47

Hello!
Sorry to resurrect an older topic, but I wanted to post on update to see if I have done this correctly.

Just quick background on my situation: I have never contributed to an IRA until this year, 2008. I contributed $5,000 to a Roth IRA through “broker A” which then got hammered down to $3000. I then contributed $5000 to a Roth IRA with “broker B” (so a total of $10,000 contributed) giving me an excess contribution of $5000 for 2008.

I filled out a “removal of excess contribution” form with “broker A” to return my $5000 contribution, which was now only worth $3000. My account with “broker B” remained open, and, thanks to the recent upturn, is worth $6,000.

From our previous postings, I was under the impression that “Broker A” should report a return of contribution for $5,000 on form 1099R. When I called, however, they said that the number the IRS will see on form 1099R will be the $3000 that was actually removed.

This has me a bit worried, because the IRS is going to receive 5498 forms that add up to $10,000 for 2008, and a 1099R that shows a $3000 return of contribution, meaning the net will be $7,000, $2000 over my limit for 2008.

So I called “Broker A” and asked why “Broker A” didn’t report the total 5,000 contribution return. They said that they were following the IRS guidelines under code “DJ 8.”

I made sure that “Broker A” understood I was asking for a return of all my 2008 contributions to them, and the form I filled out states that I am removing an excess contribution of $5,000 from my account. Yet they still insist that form 1099R will read only $3000.

I called the IRS then to explain my situation, and–to my surprise–they told me that this was the correct way to do it. They said I simply had to place the $3,000 amount on line 15A of my 1040 and then attach a note explaining that it was a return of a $5,000 contribution. I asked them how the IRS would know I didn’t over-contributed if the net of the 1099R and 5498 was $7000, and the IRS said they know by the note I leave on my 1040. The IRS person then directed me to page 4 of PUB 8606, which said that I don’t need to use form 8606 and I just need to attach the note, as explained above.

So, does this seem right? I guess I am a bit concerned because I thought the 1099R form was supposed to show the number $5,000 and not the actual amount returned to me ($3,000).

Also, where would I attach the note? Would I just take a small sheet of paper and staple it to the front of my 1040?

Thanks so much for all your help with this!

PS I meet with my tax advisor soon, so I’m trying to make sure I have a handle on everything before I go in!



Submitted by Rick T on Wed, 2008-12-24 00:52

sorry for the bump, but I was wondering, as I described in the last post, if it makes sense that the 1099R will show $3000, since I originally thought this should read $5000.

Thanks.



Submitted by Alan Spross on Wed, 2008-12-24 04:46

Yes, the broker procedure IS correct. The amount on the 1099R should be the actual dollar amount returned (or recharacterized if that is what the taxpayer is doing).

The IRS requests an explanatory statement for transactions of this type to fill this “gap” in the reporting procedures. You will NOT have to worry about an excess contribution if you attach the explanatory statement to your return.

It should read as follows:
“On xx/xx/2008 I contributed $5,000 to my Roth IRA. On xx/xx/2008 I requested a return of my full contribution, which was then worth $3,000.”

On your 1040, line 15a should show 3,000 and nothing on 15b (if you received the contribution back in the same year that the contribution was for).
The IRS will see from your explanation that you requested a total return of the contribution, not a partial return, and will subtract 5,000 from their total of 10,000 on Forms 5498.



Submitted by Jordan Bernstein on Tue, 2009-03-03 15:09

So I’ve just discovered this withdraw & re-contribution option in the last couple of days, and it seems like a no-brainer move to make with my 2008 Roth contributions (which have seen 40% declines in value).

However, I wonder if I’m going to run into difficulty in calculating today’s value of my $5000 in contributions. My contributions were all made to the same target retirement fund, so I can easily calculate today’s value of the # of shares I purchased. However, my Roth already had a starting value at the beginning of the year, and I transfered pre-2008 contributions between funds. Is this going to complicate my calculations? Or do I simply request a withdrawl of the value of the # of shares I purchased in the target retirement fund through the year?

Any help or guidance on calculating is appreciated. (I assume Vanguard can calculate the proper withdrawl amount once I ask them to return the 2008 contribution, but I want to do my own calculation to ensure they are consistent).



Submitted by Alan Spross on Tue, 2009-03-03 16:06

Vanguard will do the earnings calculation on the contribution that you wish to have returned. That calculation will include the investment results of all your holdings in the Roth IRA that holds the contribution, not just the holding that the contribution itself purchased. There have been cases where Vanguard has needed to include other Roth IRA accounts that you have with them as well in certain cases because of their account platform involving sweep money funds. I do not know if you will run into this. However, you can use Worksheet 1-4 on p 33 of Pub 590 to check their calcs. If more than one account will be involved, add them together for worksheet purposes. As you know, the value can change dramatically from day to day, so you almost have to know exactly when Vanguard is going to do the actual calculation. The larger the loss, the less you get back.



Submitted by Christian Klim on Sat, 2009-03-07 00:20

[quote=”[email protected]“]Yes, the broker procedure IS correct. The amount on the 1099R should be the actual dollar amount returned (or recharacterized if that is what the taxpayer is doing).

The IRS requests an explanatory statement for transactions of this type to fill this “gap” in the reporting procedures. You will NOT have to worry about an excess contribution if you attach the explanatory statement to your return.

It should read as follows:
“On xx/xx/2008 I contributed $5,000 to my Roth IRA. On xx/xx/2008 I requested a return of my full contribution, which was then worth $3,000.”

On your 1040, line 15a should show 3,000 and nothing on 15b (if you received the contribution back in the same year that the contribution was for).
The IRS will see from your explanation that you requested a total return of the contribution, not a partial return, and will subtract 5,000 from their total of 10,000 on Forms 5498.[/quote]I was able to successfully do the Return of Roth Contribution for 2008, and now I’m completing my taxes with TaxCut. TaxCut is smart enough to note that I need to attach a statement to my return describing the distribution. My only problem is that I’m e-filing my return; thus, I have no way of explaining this to the IRS on the e-file (gotta love the IRS :). HR-Block suggested I
1) E-file
2) Send in a seperate note to the IRS (where the heck would I even send this?) and note my name, SSN, and explain the return of contribution

Does this make sense? Is this the correct way to do this?

EDIT*****
Nevermind, at the end the IRS wouldn’t allow me to e-file. Anyone else run into the problem not being able to e-file? Now I’ve got to print out over 25 pages and mail in 👿



Submitted by Alan Spross on Sat, 2009-03-07 04:34

There are several possible reasons that you may not e file, but the IRA changes should not be one of them. Were you provided a reason for the restriction?



Submitted by Christian Klim on Sun, 2009-03-08 01:21

[quote=”[email protected]“]There are several possible reasons that you may not e file, but the IRA changes should not be one of them. Were you provided a reason for the restriction?[/quote]
Taxcut says that the IRS won’t accept an e-file if you received a Return of Contribution for 2008. Guess its because you have to explain the distribution?



Submitted by Christian Klim on Mon, 2009-03-09 23:52

Has anyone else been able to successfully e-file form 8606?



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