Removal of Excess IRA Contributions
Hello!
If a client makes an excess contribution to an IRA but does [b]not[/b] remove it by their tax filing deadline (plus extensions), and instead they pay the 6% excise tax for the year, when they do actually go to remove the excess should earnings and/or loss be taken into account?
All of the research I’ve done shows that if the individual removes the excess contribution by their tax filing deadline earnings and/or loss are taken into account. If it is removed after the tax filing deadline, the regulations seem clear that earnings are not taken into account, but are silent on losses. Is that implied by omission?
Permalink Submitted by Alan Spross on Sat, 2008-12-06 00:23
Yes, neither earnings nor losses are considered. These calculations only apply if the excess contribution is corrected on a timely basis. When the 6% excise tax is incurred, there is no earnings calculation, as the two are mutually exclusive.
Since the earnings calculation can be positive or negative, you are correct that losses are also ignored for a late correction. Only the actual amount of the contribution must be removed and Form 5329 filed with the 1040 (and 8606 if a Roth) to show the corrective distribution. The form automatically allows an unmade regular contribution for the following years to reduce the balance of excess contributions, and therefore the 6% tax for the second year and additional years.
Permalink Submitted by Alanna Crawford on Tue, 2008-12-09 14:14
Thank you!