reporting excess IRA contribution earnings

Submitted by Lauren Jarvi on Fri, 2014-04-25 18:15

T/P made $6000 IRA contributions in Feb 2012 for 2011 as well as for 2012.

Turns out she didn’t have any earned income either year and in April 2013 withdrew the $12,000 plus the $237.54 interest it had earned.

In early 2014 she gets the 2013 1099-R showing the withdrawal and the taxable earnings of $237.54, half of which was presumably earned on the 2011 excess contribution, half on the 2012 excess contribution. Box 7 code is simply P and IRA box is checked.

She apparently amended her 2011 returns a year ago and reported the $118.77 interest income. She included the other $118.77 on her timely filed 2012 return.

If I had been part of the picture a year ago I’m not sure I would have amended 2011 at all, but likely put the full $237.54 on her 2012 return. That’s what the Code P refers to, but is it correct? Is the interest included in income in the year that the contribution was made, or the year for which it was made?

In addition I believe she is subject to the 6% excise tax on her 2011 excess contribution for both 2011 and 2012 since the amount was not withdrawn until 2013. That tax should not apply to the 2012 contribution since it was withdrawn prior to the due date of her 2012 return.



Submitted by Alan - IRA critic on Fri, 2014-04-25 20:22

You are mostly correct. The deadline to correct the 2011 excess contribution was 10/15/2012. Only the 2012 contribution was eligible for correction coded P. It seems like the IRA custodian either assigned both contributions for tax year 2012 in which case the 1099R would be correct, or they assigned the contributions to the correct years and messed up the 1099R. First thing to check is if the taxpayer has statement records or a Form 5498 (contributions made) showing that a 6,000 contribution was made for each year, although it seems odd that a custodian would think  that a 12,000 contribution would ever be made for a single year. If the contributions were assigned correctly, then the 6% excise would be due for 2011 and 2012 both as you indicated. Once you know what the custodian did with the 2011 contribution from the beginning, we can determine what needs to be done now.

Submitted by Lauren Jarvi on Mon, 2014-04-28 20:06

Bank has clearly accepted the two $6000 contributions as for 2011 and 2012.  Multiple docs including 5498’s refer to it that way.This has me wonderng if the 6% excise taxc is actually due twice on the 2011 contribution since it was withdraw in April 2013.  Your thoughts?And now back to the earnings.  The 1099-R shows $12,237.54 in Box 1, $237.54 in Box 2a and P in Box 7.  I’m inclined to think this may be ccorrect, but am not entirely convinced.  If the earnings are taxed in the year for which they are made it must be split.  If they are taxed in the year in which the contrubtuion is made, then all belongs in 2012.  Pub 590 seems to refer to ‘in the year’ contributed.

Submitted by Alan - IRA critic on Mon, 2014-04-28 23:55

  • What makes this a mess is that the 1099R is incorrect because a 2011 contribution cannot be withdrawn with earnings after 10/15/2012. What should have been done is the 2011 contribution withdrawn without earnings as a normal distribution on its own 1099R and another 1099R coded P for the 2012 contribution only. This means the bank needs to rescind the current 1099R and reissue as two 1099R forms. The earnings calculation should ONLY be done on the 2012 contribution. The 6% excise tax and withdrawal of earnings are mutually exclusive. Since the 6% tax is due for two years, the 2011 contribution of 6,000 should have been withdrawn as a normal distribution. It is possible that some of the 237.54 goes with the 2011 contribution and should go back into the Roth.
  • Plan B – while this plan is technically incorrect, client could report under the current 1099R. This would involve treating that 1099R as correct (when it isn’t), and therefore treating the entire 12,000 as a 2012 contribution. Tax and penalty would be due on the earnings on the 2012 return, but there would be no 6% excise tax because the contributions were deemed to be made for 2012. While easier to do this, there is the risk of unintended consequences.
  • Since the bank messed this up, taxpayer might want to ask the bank to issue corrected 1099R forms, but the excise taxes will be expensive. Talk only to senior person at the bank, as this will probably cause mass confusion there.

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