Can I recontribute a Roth removal/distribution?
I greatly appreciate any help on this – the 590 is perfectly vague on this scenario:
Page 64/108 of the 2007 590 says if there is an excess contribution to a Roth IRA, (summarizing) as long as any growth (properly calculated) is removed with the excess portion the IRS will consider it as if the contribution was never made…
The question I have is if I did qualify to make a full Roth IRA contribution for the year and needed to pull some of my current year contributions back out (with any properly calculated earnings on the account), is the contribution considered to not be made and I can still contribute by April 15th of the following year? Or did I burn through my contribution for the year?
To note, the removal/distribution was in 2007 for 2007 year contributions. I would like to make a prior year contribution to allow myself to max out this year, if this is appropriate to do so.
Any supporting documentation if available is GREATLY appreciated.
Many, many thanks in advance,
MV
Permalink Submitted by Alan Spross on Wed, 2008-02-06 01:33
Good question because documentation on this issue IS in short supply and certainly not in Pub 590.
I believe that you CAN make an IRA contribution after correcting an earlier one as a stated excess contribution or simply as a request to return the contribution. Taxpayers may excess contributions all the time and correct them after the fact, and there is nothing in the code to suggest that a correction is the final act allowed. The important thing is to end up with an allowed contribution after all the activity.
1099R forms reporting excess contribution corrections are not dated, so there is no reported chronology of these events. All the IRS looks at after matching up the 1099R and 5498 forms is whether the final total of contributions is allowed.
Permalink Submitted by M V on Thu, 2008-02-07 22:55
Very much appreciated!
To clarify – are you saying a distribution will be shown/can be shown on the 1099 and 5498 as netting out?
Upon further research this answer is addressed conveniently on page 4 of the Instructions for Form 8606 and also the Instructions for the Form 5329.
I will have to pay the 10% penalty on the growth (properly calculated).
Any other thoughts/concerns/etc that come to anyone’s mind I should be aware of?
Again, greatly appreciated!
Permalink Submitted by Alan Spross on Fri, 2008-02-08 00:14
Just be sure the withdrawal is properly coded as a return of excess contributions and earnings and NOT as an early withdrawal. It must be coded that way to reinstate the capacity to make a regular contribution for the year.
Permalink Submitted by M V on Tue, 2008-02-12 16:55
Many continued thanks Alan!
In my lack of infinite wisdom (and without clarification from my financial institution) I did not do a removal of excess (since I was not in excess as an average person would understand it). It is my understanding that as such, I need to file the 5329 (to indicate I do not owe a penalty) in addition to the 8606?
Additional question – do I indicate the earnings attributable to the removal on line 15b of the 1040 (i.e. – 15a $1700, 15b $3)?
May your kindness come back to you tenfold!
Permalink Submitted by Alan Spross on Wed, 2008-02-13 05:45
What code # shows in Box 7 of your 1099R reporting the distribution? This reflects the IRA custodians understanding of your instructions at the time of distribution. If it is NOT reflective of a return of contributions and earnings, then you are stuck with having used up your contribution and your distribution is an early distribution which is reported on Form 8606 under the ordering rules for Roth distributions. If it is less than the regular contributions you have made back to your first Roth contribution, it will be tax free under the 8606 reporting. However, you will have used up your 2007 contribution and cannot make another one.
If the IRA custodian mis understood your intentions, I hate to say it, but you probably do not stand a chance getting them to correct the 1099R at this late date. You might have if you had called them on it right after receiving the distribution. There is a chance that if you asked them to calculate the earnings, they knew what you were doing and coded it correctly………..what is the code that shows ?
Permalink Submitted by M V on Tue, 2008-02-19 23:39
Many thanks again.
It shows Distribution Code J.
In working with my financial institution, it is as you say – nothing they can do and I burned my contribution. There was no clarification by my institution unfortunately when I called in and conveniently, the IRS calling this scenario a “removal of excess” is not what the average (or even semi-advanced) person would think this was.
Well, this lesson is learned. Again, I definitely appreciate your time and help.
Be well,