Undo Traditional IRA Contribution
I have made a $5000 non-deductable contribution to my tradition IRA account for 2010. I have an unexpected need for that cash. Is there a way for me to undo the 2010 contribution without any tax impact? How about contribution for earlier years? Thanks.
Permalink Submitted by Alan Spross on Sun, 2010-07-11 01:21
You can ask for a return of your 2010 contribution, and if you filed your 2009 return on time or filed an extension by 4/15, you can also request a return of your 2009 contribution. The IRA custodian must perform a calculation of earnings or loss on any such contributions being returned. If earnings were positive, the earnings will be taxable, and you will also owe a 10% penalty on the earnings unless you are 59.5. But unless you have considerable positive earnings, the tax bill will be modest. Be sure to tell the custodian which year you are asking to be returned so that it is coded correctly on the 1099R you will receive next January.
You will also need to amend your 2009 return if you filed Form 8606 reporting a non deductible contribution OR if you claimed a deduction for the contribution that is being returned.
Contributions made for years prior to 2009 cannot be handled in the above manner. You would have to request an early distribution for any earlier years and that would probably be mostly taxable and subject to penalty.
Permalink Submitted by Gregory Soloman on Sun, 2010-07-11 07:37
Thank you for your quick response alan-oniras. I have ~100K in my IRA and have suffered minor loss from the beginning of the year. So, if I only want to undo my 2010 contribution, I can contact my brokerage to do so and it will not have any tax impact for my 2010 tax return, right? Thanks again for the help.
Permalink Submitted by Alan Spross on Sun, 2010-07-11 17:04
If the specific IRA account to which you made you 2010 contribution declined in value during the period that the account holds the contribution, there will be negative earnings and therefore no tax due for removing the contribution. But that also means that you will get back less than what you contributed. For example, if account is down 5%, you would get back 5% less than your original contribution. Again, the results are calculated from the date you made the contribution, not from the beginning of the year unless that is when you made the contribution.
Finally, if you don’t need the entire contribution back, you can ask for a partial return of the contribution and leave the rest in the IRA. You can also make another replacement contribution later on if you have the cash to do so.