Correcting excess contribution from a different IRA account?

Submitted by JAMES MAGNO on Wed, 2009-02-04 01:25

If taxpayer choses he can aggregate all required distributions and take from one IRA account.
If the client needs to cure an excess contribution , must that distribution be taken from the same IRA to which the excess contribution was made or can IRAs be aggregated and treat a distribution from any IRA account as satisfying the required distibution to cure the excess contribution?
Taxpayer has already contributed to one IRA and wishes withdraw from another. The reason for this has to do with fixing a problem with respect to surrender fees etc which arose due to satisfaction of 2008 RMD – withdrawal was taken in 2008 but part was returned in year 2009. I think this is clearly an excess contribution for year 2009 but a reasonable person might counter that the 2009 contribution was a correction to year 2008 RMD – that is in my opinion a bad result because then your exposed to a potential 50% penalty.
[i][b]The main question is this – can excess contribution be cured by distributiion out of any taxpayer IRA or must it be out of the same account that received the excess contribution?[/b][/i] To me that is still an easy fix by doing a trustee to trustee transfer prior to the corrective distribution.
Thank you (Great brain teaser, eh?)
Jim



Submitted by Alan Spross on Wed, 2009-02-04 03:55

Jim,
I guess it is a brain teasor because I cannot really follow what happened to create this contribution. If a greater amount than the correct RMD is distributed, it can be rolled over within 60 days and would not constitute an excess contribution. If any part of an RMD is rolled over, then you DO have an excess contribution.

OK, back to the original question. The IRS Regs clearly require the corrective distribution AND the net earnings attributable to it to be distributed from the IRA that received the contribution.

Simple, so far. But now assume that this IRA was transferred into another pre existing IRA that now combines two IRA accounts. This is probably the situation you contemplated with your referral to a transfer. The IRS Regs now say that the calculation and return must come from the account that now holds the contribution. This apparently would appear to dilute the investment experience that occurred in the now defunct account while IT held the original contribution. This is a practical solution allowing the new IRA custodian to solely handle the earnings calculation and distribution. It could also conceivably be a loophole of sorts if the actual earnings were to be tweaked to the taxpayer’s advantage.

It could get even more complex if only a partial transfer was made leaving part of the excess contribution in two different accounts. In this situation, there is no Reg that addresses the situation entirely, but the obvious conclusion would be that the two accounts would have to be combined for the earnings calculation, with the correct distribution being made from either or both and the 1099R code would reflect the the respective amounts distributed.

Therefore, you are correct that if a transfer is done prior to the corrective distribution, the corrective distribution can only be done from the surviving account. It appears that this could change the earnings calculation outcome as well. If no transfer is done, the correction must be done only with the original account that received the excess contribution.

Submitted by JAMES MAGNO on Wed, 2009-02-04 04:25

Thanks Alan!
The original withdrawal in year 2008 was equal to the RMD. Roughly 80% of that amount was transferred back to the same IRA account in Jan 2009. My opinion is that the 2008 withdrawal speaks for itself, ie no problems because RMD is met. However the return of the 80% in year 2009 is a problem. Sounds simple…but the investment firm has tentatively taken the position that the 80% transfer back to the account is a corrective transaction. I think this is a bad idea even if there is swift action to make a subsequent transfer to satisfy the purported 80% shortfall on the RMD.
I am glad I made it clear what my initial question was to be. I realize that my additional background was about as clear as mud. Now here we are in February and the taxpayer transferred cash back to the IRA account. I can see the perspective that the IA is taking and I realize that there is more than one way to solve this, but in the absence of a rev ruling or a letter ruling, it seems pretty clear that the $$$ must come from that same IRA account.
Hope this clarifies a bit for anyone that is scoring at home.
Cheers
Jim M

Submitted by Alan Spross on Wed, 2009-02-04 04:37

Technically, the RMD has been satisfied by the distribution, so there is no RMD shortfall.

But the subsequent rollover of an ineligible amount (an RMD) is an excess regular contribution to the IRA and would be corrected the same way as any other excess contribution.

There is no violation if a direct transfer is done, but the corrective procedures may become an area of debate after the transfer. By all means another rollover should NOT be done, because he has already used up his one rollover for 12 months into the IRA.

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