Excess Contribution/Death
If my mother made a contribution to a traditional IRA in 2009 and had no earned income making it an excess contribution, then passed away in 2010 before the excess was removed. Can her sole spouse beneficiary remove those funds as an excess contribution if they have filed an extension with the IRS to October 15, 2010. If so, how is it removed?
Permalink Submitted by Alan Spross on Mon, 2010-09-13 20:00
Sorry about your loss.
Yes, the beneficiary should advise the IRA custodian that an excess contribution was made and ask that it be removed with allocated earnings. The distribution should be coded as a corrective distribution but will come out under beneficiary’s SSN whether he assumes ownership of the IRA or not. Therefore, it should also include the Code 4 for a beneficiary distribution and that will eliminate any early withdrawal penalty on the earnings in case he was not yet 59.5. Your mother’s 09 return should NOT deduct the contribution or file an 8606 to report a non deductible contribution. Therefore, since the contribution was not deducted on her return, it will not be taxable to the beneficiary. Only tax to the beneficiary would be ordinary income tax on allocated earnings.
That said, as in other excess contribution situations, IF this contribution has now generated a large earnings amount, such as a contribution invested in the market in mid 2009, it will be of greater benefit NOT to correct the contribution, but to pay the 6% excise tax on it to protect the earnings, and then remove the contribution amount only after 10/15/2010. That would be just a normal distribution and the earnings stay in the IRA. If this option is considered, it would be better to deduct the contribution on her final return, if eligible.
Permalink Submitted by Anonymous (not verified) on Mon, 2010-09-13 20:21
Not sure what the custodian requirements may be, but they will probably need the executor of the estate, rather than the beneficary, to make the excess distribution. Please correct me if I’m wrong.
pko
Permalink Submitted by Erin Cochenet on Mon, 2010-09-13 20:54
If it is the executor of the estate that will be removing the funds then shouldn’t the reporting of the P4 (excess/death) be to the estate rather than the beneficiary. What if there is no estate? Then should the check be made payable to the decedent and a transfer by affidavit be completed?
Does it make a difference that they are in a community property state and file jointly?
Permalink Submitted by Alan Spross on Mon, 2010-09-13 21:53
The executor has no authority over the funds unless the estate is the beneficiary, and any distributions must be made to the beneficiary as you indicated.
There is a lack of Regs on this subject. but there might be some non binding PLRs out there somewhere. It is true that the IRS HAS allowed executors authority to pursue certain actions, such as recharacterizing conversions done by a decedent, BUT the IRS is not concerned with what kind of legal mess this could create. Imagine a TIRA with a different beneficiary than the Roth IRA that is being recharacterized. Sounds like lawsuit country to me.
In view of pko’s point, it is possible that a risk averse custodian (ie most all of them) may ask for a release from the executor on the grounds that these funds SHOULD be part of the probate estate had they not been improperly contributed. As such there could easily be a different will beneficiary than IRA beneficiary. Most IRS rulings are limited to proper contribution limits and taking RMDs on time so taxes can be collected rather than legal entanglements regarding rights to the funds. If the custodian refused a corrective distribution without signoffs, some beneficiaries might simply withdraw as a normal distribution and risk the 6% excise tax for one year. And earnings would stay in the account doing it this way.
This is the first post I can recall asking this question, so by the time the IRS acts on decedent excess contributions, most estates are terminated and someone tells the IRS that the owner was deceased in the past, and then the IRS probably drops the matter. If they didn’t we probably would have more questions since a certain number of these cases is very likely. On a similar vein, I cannot recall a post where the IRS hit up a beneficiary for several years of missed RMDs by the deceased owner. And we know that this is also a fairly frequent situation.
Permalink Submitted by Anonymous (not verified) on Mon, 2010-09-13 22:10
Thanks.
I guess then I am interested from [i]ecochenet[/i] what this custodian will ask for.
pko