Age 591/2 and Earnings on Excess Contribution
An excess IRA contribution for 2010 is returned by the extended due date in 2011 with allocated earnings. When does attaining age 591/2 apply for the 10% penalty on earnings. Is it 12/31//10 of the year of taxation or when earnings are distributed in 2011. One could be under age 591/2 on 12/31/10, but well beyond age 591/2 and with earnings acquired after age 591/2 when distributed.
Permalink Submitted by Alan Spross on Tue, 2011-08-16 16:52
I am not aware of any specific IRS guidance that would alter the general rule that the date of distribution would determine whether a penalty applies. Also the earnings are calculated right up to the date of distribution of the excess contribution possibly accruing both prior and post age 59.5. Accordingly, in applicable cases, it may be best to wait for the corrective distribution if the costs of waiting do not exceed the elimination of the 10% penalty.
I have been more concerned about deemed distribution coding on defaulted 401k loans. There have been cases where the employee received the loan before 59.5 but the deemed distribution 1099R was issued after 59.5 and still was coded as an early distribution, presumably due to the actual receipt date of the funds, not the date they were later deemed distributed. Can’t find anything definitive on that either.