Removal of Excess IRA Contributions

Submitted by Geoffrey Kasher on Mon, 2023-10-30 12:38

GM, this is a follow-up to an issue I previously posted.

The deceased client’s IRA was treated as a taxable distribution for the tax year 2022 and not as a trustee-to-trustee transfer into an IRA.

The insurance company that processed the distribution issued a 1099 to the beneficiary.

The issue was not discovered until 2023 when the client was preparing the 2022 1040.

The receiving company is treating the death benefit as an excess contribution.

Questions:

RMDs were taken both in 2022 and 2023. Does this have any effect on the issue at all?

When the excess contributions come out of the IRA will any income tax and 10% early withdrawal penalty be incurred?

What years will the 6% excise tax be charged against? 2022 only? or 2022 and 2023?



Submitted by Alan - IRA critic on Mon, 2023-10-30 14:38

  • This problem is not affected by the RMD status of the accounts if the RMD had separately been completed. While RMDs cannot be rolled over, that is irrelevant in this situation because no distribution of any kind to a non spouse beneficiary can be rolled over.
  • The 1099R for the first distribution will generate the taxable income unless the beneficiary can convince the IRS that a valid transfer (not a rollover) was executed and the 1099R should never have been issued. If the client can produce clear documentation that a valid transfer actually occurred, the IRS would probably accept it, despite the rogue 1099R.
  • Otherwise, the new IRA custodian must issue a corrective distribution of the excess contribution. That should result in only the gain generated on that excess contribution being taxable, and there is no longer a 10% penalty for removal of earnings with an excess contribution for anyone. 
  • If I recall correctly, the receiving custodian treated this as a transfer and did not issue a 5498. This provides additional credibility that the 1099R was in error.

Submitted by Geoffrey Kasher on Mon, 2023-10-30 16:52

client would need to submit 4852 and documentation. you had noted before that submitting this would not trigger any audit flag. I that your experience. I wont hold you to it. 🙂

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