Excess IRA Contribution
The IRS formula used to determine Net Income on Excess IRA contributions is as follows:
Net Income = Excess Contribution * (Adjusted Closing Bal. – Adjusted Opening Bal.) / Adjusted Opening Balance.
If an excess contribution is made in 2014 and again 2015, but not removed from the IRA until 2015 (before the deadline for 2014 extensions) are two separate calculations required for each tax year? I am assuming this is the case as you would want to have two separate 1099-Rs to document the excess contributions and earnings attributable for each tax year.
The IRS describes the Opening Balance as the fair market value of the IRA at the beginning of the computation period, plus any amounts of contributions made during the computation period. The computation period is defined as the period immediately prior to the excess contribution and the period immediately prior to the removal of the excess. Since this scenario involves excess contributions in two separate tax years is there one beginning date or two distinct beginning dates and opening balances? If so, how would the adjusted opening balance be calculated in this case?
Permalink Submitted by Alan - IRA critic on Wed, 2015-06-17 21:24
Excellent question, and the IRS has not provided a clear answer. TD 9056 includes a statement that when multiple contributions are being returned, the computation period and therefore the opening balance starts on the date of the oldest contribution being returned. The guidelines are very compromised in the interest of simplifying the earnings calculation for IRA custodians, and when there are various dates, distributions, and contributions included in the computation period, the end result may not even be particularly equitable. Therefore, the custodian gets one earnings figure for all the returned contributions, and that does not square up with the following provision in Sec 408(d)(4):
In reality, custodians may handle this in different ways, but one solution might be to take the single earnings amount and pro rate it to each contribution year according to the amount of the contributions in each year. Then there would be a 1099R coded P and another coded 8. However, both the custodian and the taxpayer would probably prefer just one 1099R affecting only one tax return. The IRS is not likely to dispute any of these approaches since TD 9056 is compromised to begin with. So – no clear answer.