Hi there,
If a customer wants to remove excess 2014 contributions in 2017, and has paid the 6% excise tax every year, is he still required to remove the net income attributable to those contributions? Most companies seem to say that he is not required, but there doesn’t seem to be any official documentation on this as far as I can find. Thanks in advance for your help!
The only reason to tell the IRA custodian it is a removal of an excess contribution for a prior year (after the 10/15 deadline) is if it is a traditional IRA, the 1099-R reporting is a little different. Box 2a, “Taxable Amount” is left blank for excess removal, but it is the same as Box 1, “Gross Distribution” for normal or early distributions.
Yes, good catch there. This is a complex and somewhat confusing issue. I would guess that the unique 1099R coding with 2a blank should be recognized by tax programs as a removal of an aged excess contribution. This also requires the taxpayer to verify that there is no inconsistency in reporting the original contribution and reporting the removal. If he deducted the original contribution he must either amend that return to remove the deduction if that tax year is not yet closed OR include the removal distribution as taxable. If the tax year is closed, the choice is eliminated but there does not appear to be any guidance whether the removal is automatically deemed to apply to the oldest excess year or if the taxpayer can elect a more recent year which is still an open year. Further, all this must be coordinated with Form 5329 in the removal year to document that removal and end the excise taxes.
Permalink Submitted by Alan - IRA critic on Tue, 2017-10-10 16:43
Earnings are only removed when the excise tax is avoided by having the contribution returned with earnings no later than 10/15 of the year following the contribution year. The deadline for removal of a 2014 excess with earnings was 10/15/2015. Once you owe the excise tax for a year, you just request distribution of the excess amount and the earnings remain in the IRA. Therefore, the excise tax and removal of earnings are mutually exclusive. In fact, in this example the customer would not even mention an excess contribution to the custodian, would just request a distribution of $x (the excess amount). However, in completing Form 5329 for 2015 and 2016 be sure that the excess was not applied automatically by the form to one of those years. If so, no removal is needed. Removal of excess contributions AFTER the extended due date is addressed in Code section 408(d)(5) and in Pub 590-A.