Return of Excess Contributions
Would I use a “Return of Excess Contributions” form to withdraw money from a Traditional IRA that should have been established as a Beneficiary IRA when the improperly established IRA was opened in 2007? In other words, is there a time limit on how long I can use the “Return of Excess Contributions” form to correct an error after all IRS deadlines to correct the error have been missed?
Also, when moving money from a Traditional IRA to an Inherited IRA within the same financial institution, would that movement of funds be considered an internal transfer or an external transfer?
Permalink Submitted by Alan Spross on Fri, 2009-12-18 19:01
The deadline to use that form is the extended due date in the year following the contribution year. After that date the earnings calculation is not applicable and the 6% excise tax becomes due. While the question has not come up, I see nothing in the tax code that limits corrective distributions to the IRA owner, therefore if the owner makes an excess contribution and then dies, the beneficiary can use the form to correct the problem as long as the extended due date has not passed. One difference is that the early withdrawal penalty would not apply because it would also be a death distribution. The 1099R instructions corroborate this by showing code 4 as an acceptable combination with 8 or P.
Establishing a new IRA for the beneficiary would be a same trustee transfer if the custodian was the same. It would be a TT to TT transfer if the custodian was changed.
Permalink Submitted by Jack Edelman on Fri, 2009-12-18 21:50
What form does the beneficiary use if the extended due date has passed?
Permalink Submitted by Alan Spross on Fri, 2009-12-18 22:56
The form depends on the custodian, but the option to be selected is just a regular distribution of the non earnings adjusted excess amount. The distribution would be fully taxable unless beneficiary inherited some basis per Form 8606. A 5329 would also be needed to report the 6% excise tax on the excess contribution, and the distribution would not count toward any RMD required by the beneficiary or vice versa.
Permalink Submitted by Jose Morales on Mon, 2009-12-21 16:36
Just to clarify, this was an excess contribution made by the original IRA owner before passing that the beneficiary now wants to correct? Or did a non-spouse beneficiary have funds moved from the deceased IRA into an IRA of their own, rather than into an inherited IRA, and now wants to use the method for correcting an excess contribution to reinstate their ability to open an inherited IRA?
Permalink Submitted by Alan Spross on Mon, 2009-12-21 17:44
Good point.
The initial post is not clear on who did what and when to create this excess contribution. If this was indeed rolled into an owned IRA by the non spouse beneficiary, it must be corrected, but there is no way to reconstitute an inherited IRA from the corrective distribution short of major custodial error and possibly letter ruling.