Excess contribution & earnings taxed?
Client made a traditional IRA contribution in 2009 and is now looking to remove the excess contribution in 2010. The amount that is removed, will the client have to pay taxes on this amount in the year the funds were removed or the year the actual contribution was made. How are the earnings taxed, same year of the contribution or at the time they are removed?
How will the 1099 be coded?
Thanks
Permalink Submitted by Alan Spross on Mon, 2010-02-15 17:10
There are no taxes on the amount of the contribution removed, but client should not deduct the contribution on the 2009 return either. The allocated earnings are taxable FOR the year IN which the contribution was made which would be 2009. The taxable earnings amount is also subject to 10% penalty unless client is 59.5 or meets other exception.
The 1099R would be issued in Jan, 2011 and coded with a “P” in Box 7 meaning that the earnings are taxable in the prior year, ie 2009. Also a 1 if prior to 59.5.