earnings on contrib withdrawn – year taxable?
client makes traditional ira contribution april 2009 for 2008. later determines ira contribution not deductible due to active participant rules. client wants to withdraw ira contribution and related earnings by extended due date of tax return, 10-15-09. when are the related earnings, which are withdrawn before october 15, 2009, taxable? 08 return or 09 return?
Permalink Submitted by Alan Spross on Wed, 2009-10-07 23:23
2009, the year the contribution was actually made. The 1099R that is issued will include Code 8 in Box 7, and that means the earnings are taxable in 2009 for a 1009 1099R. If the earnings were taxable in 2008, the Code would be “P” for prior year.
Note that client could also just file an 8606 for a non deductible TIRA contribution. They could then convert all or part of their TIRA in 2010, but the pro rate rules will apply to determine how much of that conversion is tax free. Another option is to recharacterize the TIRA contribution as Roth contribution, although they need to check to see if they fall under the Roth income limit as well.