Excess IRA Contributions – Made in 2018 and Withdrawn in 2020

Submitted by Jefferson Chickering on Sun, 2021-06-13 12:03

Hi All:

I’m in discussion with an Investment Advisor regarding an incorrect Form 1099-R.

They’ve issued a 1099-R as if it were a regular early distribution from an IRA. The Advisor is as frustrated as I am :(. We’ll get it right, eventually :).

“Fact” Pattern:

A taxpayer withdrew their Excess IRA Contribution made in 2018. It was withdrawn in 2020.

They had earnings on the Excess IRA Contribution of $1,500.

The taxpayer SHOULD receive 1099-R’s, for the 2020 year, as follows:

> 1099-R – Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $0. Box 7, Distribution Code P, Excess Contributions.

> 1099-R – Box 1, Gross Distribution, $1,500. Box 2a, Taxable Distribution, $1,500. Box 7, Distribution Code 8, Earnings on Excess Contributions.

Correct Fact Pattern or Incorrect Fact Pattern?

TY kindly in advance for any responses.

~JC



Submitted by Alan - IRA critic on Sun, 2021-06-13 16:24

The 1099R is probably wrong, but not for the reason you think. The removal of excess was done AFTER the due date, therefore an excise tax is due, but the earnings stay in the TIRA (see Pub 590A, p 34). When the removal was requested, the custodian should have been told that the distribution is to remove a 2018 excess contribution per Sec 408(d)(5). That should produce a blank box 2a on the 1099R instead of 2a being the same as Box 1. Box 7 should be either 1 or 7, and not use the codes for a distribution of excess with earnings before the due date, since this is after the due date. Taxpayer must be sure to not have deducted the contribution on the 2018 return.
Excess TIRA contributions are more complex than excess Roth contributions due to the TIRA deduction. Was this actually an excess contribution due to lack of earned income? Sometimes people consider a TIRA contribution that was not deductible due to income as an excess contribution when it is not an excess, it is just non deductible.
Please clarify further regarding whether this was really an excess contribution, and I can then advise how to deal with this. The custodian will probably resist amending the 1099R at this point.

Submitted by Jefferson Chickering on Mon, 2021-06-14 13:28

Thank you, Alan.
 
We have been filing the Excise Tax on Form 5329 for 2018 and 2019.
 
We did instruct that this was a removal of an Excess IRA Contribution.
 
Regarding the “Earnings,” I do not know the exact amount of the Earnings on the Excess Contribution, but, wanted to present something as an Example to this question, therefore I put in $1,500.
 
I cannot figure out where, on Page 34 of Pub 590A, it states that the Earnings are NOT Taxable.
 
It was definitely an Excess Contribution. 
 
IRA was not deducted nor considered non-deductible.
 
Additionally, I’m not sure why you are saying Code P is incorrect and why we wouldn’t use Code 8 or Code P for this, rather, you are mentioning to use Code 1 or 7, which indicates a regular distribution, either “early” or “normal.”
 
Regardless, let me be more transparent and give a little more information:
 
Both Wife and Husband, had Excess IRA Contributions in 2018.
 
The wife’s 1099-R issued upon the Return of Excess Contributions appeared entirely correct and the husband’s 1099-R appeared entirely incorrect.  As in, same fact pattern, but why were they not consistent, either, consistently correct  or incorrect?
 
I said we need to correct this. 
 
Wife’s Actual 1099-R:
 
1099-R – Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $0. Box 7, Distribution Code P, Excess Contributions.
 
Husband’s Actual 1099-R:
 
1099-R – Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $6,500. Box 7, Distribution Code 1, Early withdrawal.
 
Neither husband or wife were issued a second 1099-R for the Earnings on the Excess Contribution.
 
I asked the Custodian to fix the 1099-R for the Husband, as it should be identical to the wife’s, which I felt was correct, but, they won’t fix it and more confusion is being created.
 
In another chat room, I was told that there should be another 1099-R for both wife and husband to illustrate the Earnings on the Excess Contributions.
 
This is complex and someone referred me to this Chat.  
  ~JC 

Submitted by Alan - IRA critic on Mon, 2021-06-14 16:22

So each 1099R has a different error. Wife’s should not have Code P, since code P only applies to corrective distributions prior to the due date. 2a should be blank rather than 0. This distribution came well after the due date for the 2018 return. P should be replaced with either 1 or 7 depending on age of spouse. Husband’s 1099R has a different error, as Box 2a should be blank (see 1099R Inst, p 11 just above the box 2b instructions). 
Both 1099R forms were correct in that no earnings were distributed with the excess contribution.
Again, code P only applies when the distribution is done prior to the due date of the 2018 return. Earnings must come out when P is used, but do not come out when the contribution is removed after the due date.
Is there any chance that wife’s excess contribution was for 2019?  If so, then P would be correct.
If custodian refuses to issue corrected 1099R forms, you might have to file a 4852 with the IRS, correcting the incorrect forms, then reporting the distributions accordingly. If you try to enter these as is, there will be a conflict with the 5329 showing a 2018 excess with the removal shown on the 2020 5329. That is not consistent with the Code P.
End result is that there should be 0 taxable income for 2020. Only costs should be the 2018 and 2019 excise taxes.

Submitted by Jefferson Chickering on Tue, 2021-06-15 20:54

I appreciate ALL of your feedback and sharing all of this knowledge with me.
 
Wife’s Excess Contribution was for 2018.
 
I’ve been working on Form 4852 to Correc t Husband’s.
 
We should consider Form 4852 to Correct Wife’s, but, her Form 1099-R fix is less benign.
 
I am told that when you file Form 4852, the Returns get pulled and reviewed by hand.  In this climate, I am suspecting a VERY LONG wait for this.
 
Do you have any experience regarding timing for Form 4852?
 Thank YOU Alan!!!!  

Submitted by Alan - IRA critic on Tue, 2021-06-15 22:29

Good point about the wait. The wait for 4852 processing will even be longer than it otherwise would have been given backlog conditions at the IRS today. Adding the 4852 for wife’s should not add any processing time, as you will already have that, and since Code P would refer to removal of a 2019 contribution, I would be concerned that the IRS might think the 2018 contribution was not yet removed.  GIven these varied errors, I would expect whoever is handling tax reporting for this custodian is over their head. Would be better for taxpayer to transfer their IRA to another firm.

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