Reversing IRA contribution

Submitted by chris erickson on Thu, 2017-11-02 03:25

Hi,
I started a traditional IRA with $1000 at a bank a few months ago that is now worth $1003. I wish I hadn’t started it and would like to get my $1000 back. The bank says I will lose the interest (no big deal) but because I’m under 59.5 I am concerned that I might have to pay a 10% penalty tax.

I haven’t filed my taxes yet. Although I qualify for a deduction on the $1000 contribution, if I distribute the $1000 in the same year, the deduction and income will offset … but I still think I will owe a 10% penalty tax.

If I choose to not deduct the $1000 contribution (even though I could), then would the 10% penalty only apply to the growth (zero) or does it also still apply to the $1000 non-deductible contribution? If the penalty only applies to the growth on non-deductible contributions and not the non-deductible contribution itself, then the 10% penalty would be moot. Does this solve my problem?

Thanks!



Submitted by Alan - IRA critic on Thu, 2017-11-02 04:19

  • Sounds like this was a 2017 contribution. You should ask for a return of your 1,000 contribution and the bank will have to calculate the earnings on it and send the net total to you. You probably will not get any earnings based on what you said. You may even get less than 1,000 back if the bank charges account termination fees. You will get a 1099R in January showing the amount returned to you in Box 1 and any taxable amount (none unless you get back more than 1,000) in Box 2a. The Box 1 figure goes on line 15a of Form 1040, and nothing on 15b unless there were earnings returned as well. Do not file Form 8606 or claim a deduction on line 32. 
  • You should also include an explanatory statement indicating the amount of the 2017 contribution and the date you had it returned to you. State the amount that you actually received back (the Box 1 amount on the 1099R).
  • You are correct, the 10% penalty would ONLY apply to the earnings returned if you receive any.
  • Since you had your contribution returned, you still have the space to make a new contribution for 2017 up until 4/15/2018.

Submitted by David McFarland on Wed, 2018-04-11 00:57

I made an T-IRA contribution of $4,400 in May 2017.  In Dec 2017, I had the $4,400 returned to me.  The $4,400 was held as “cash” (long story) for the entire time, so it didn’t accumulate any earnings. The 1099-R, box 1 and 2a, both reflect the $4,400.  Box 7 contains code 8 and the IRA/SEP box is checked. Upon entering the 1099-R info into Turbo Tax, it increased the amount I owe by roughly $1,700.  If I enter zero in box 2a, the program shows a zero  increase – which should be correct. If I researched correctly, box 2a of my 1099-R should reflect the Net Income Attributable (NIA) amount. I‘be already contacted my brokerage and discussed with them. They said I was mistaken and the $4,400 in block 2a is correct. For grins, I even tried adding the $4,400 into TurboTax as a contribution to see if that would change anything. It did not since I’ve already hit the max allowed. So my question is, what to I do to avoid paying tax on the $4,400? Is my brokerage incorrect about box 2a?  If so, what are my options since they won’t change it. If my brokerage is correct, is there an additional IRS form I need to complete? I’m not really sure how to proceed from here. Any advice/assistance would be greatly appreciated. 

Submitted by Alan - IRA critic on Wed, 2018-04-11 02:12

  • The 1099R is incorrect. Code 8 means that the only amount that could appear in 2a are the earnings on the returned contribution. This is a very rare error for an IRA custodian to make. Is the custodian a small bank or small broker? In any event I suggest that you call back and ask to speak to the most experienced person available to request a corrected 1099R with 0 in Box 2a. Refer them to the second column, second bullet point on p 11 of the 1099R Inst that addresses a return of excess contributions under Sec 408(d)(4). 
  • Not sure where you are with your 2017 return, but if you still want to file by 4/17 you could override the Box 2a with a 0. Add an explanatory statement that the first 1099R issued was incorrect and should be corrected by the time the IRS looks at the return. You will not get a corrected 1099R by 4/17 even if the custodian sees the light. Of course, if you otherwise need to file an extension, then there is plenty of time to keep after the custodian for a corrected 1099R before filing. Surely, there must be someone there who understands this issue that you can talk to.

Submitted by David McFarland on Thu, 2018-04-12 16:50

Alan-iracritic, Thank you so much for the response. It is truly appreciated! 

  • The brokerage is named “The Entrust Group”, and they specialize in Self Directed IRAs. I called them on Monday, April 9. Unfortunately, the system kept looping to a voicemail no matter which option I’d choose.  I wanted to actually speak with a live person, but ended up having to them a voice message.  In that message, I explained the situation and included 1) my name and acct #, 2) the contribution date, 3) the return of contribution date, 4) reference to IRS pub 590a – page 32, and 5) reference to CFR 1.408-11 for the calculation method that should be used. On Tuesday, April 10, an Entrust Group representative called me back and said he had reached out to “their department that handles the 1099R” and that dept stated the 1099R was correct and they weren’t going to amend it. I asked if there was someone else I could speak to (i.e. the dept he was referring to), and was told no. Since I have never dealt with a return of contribution before, I thought I might have misinterpreted the p590a and 1.408-11 references. So, that’s when I posted my situation on irahelp.com. Thank you again for your response and validation.
  • Below is the course of action I plan to take. Please let me know what you think, or if you have any better suggestions.  
  1. First, I plan to file for an extension since I doubt this will be resolved before April 17.  I plan to use Form 4868 for the extension, unless there’s a more appropriate form you believe I should use. Also, since I’m unsure that the issuer will amend the 1099r, I’m reluctant to manually input a 0 for box 2a. If I did decide to override box 2a and submit my taxes this weekend, what would happen if the issuer still refused to correct the 1099?  Would I still be able to submit a 4892 at that point, or would it be too late?
  2. Second, I’ll try reaching out to the Entrust Group one more time. This time I’ll utilize email so I’ll have a paper trail for my records. I plan to email them later today, but have no idea how quickly they’ll respond.
  3. Third, if the Entrust Group still refuses to issue an amended 1099R, I’ll contact the IRS at 800-829-1040, and tell them I plan to file a 4852 due to the erroneous 1099R.
  • I’m not sure if you’ve ever heard of the Entrust Group (https://www.theentrustgroup.com/), but my experience with them has been unfavorable.  When I first decided to utilize the Self Directed IRA option to become part owner in a business, which I needed $75k for, I rolled a Fidelity IRA to The Entrust Group for the majority of funds ($70,600), then contributed the $4,400 to cover the difference. When I decided not to pursue the business investment due to disagreements with the other partners, I had the Entrust Group return my $4,400 contribution, and rolled the original $70,600 to a T Rowe Price IRA. The Entrust Group was very uncooperative and the T Rowe Price folks were very frustrated with them. But, eventually, the transaction occurred thanks to T Rowe Price’s persistence and “hand holding” of The Entrust Group’s representatives. There was still one form that T Rowe Price wanted, so they asked me to log into my Entrust account to obtain. Unfortunately, upon login I noticed that the Entrust Group had wiped out ALL of my data. I could still login without issue, but that was it.  All of my previous transactions, account statements, tax forms, historical information, everything was missing. Even my account number showed up as nonexistent. Luckily, I had periodically saved a few, not all, digital copies of some statements and transactions before they closed my account. If I hadn’t, I’d been really screwed. Anyway, that’s been the type of service I’ve received from them. That trend seems to continue as I pursue getting my 1099R amended. Very frustrating, to say the least. This last part was probably TMI.  But, I figured it might be useful background info for you in case you’re ever trying to assist someone in the future who’s having Entrust Group IRA issues. 
  • Anyway, thank you once again for your response! Also, please let me know if my planned course of action is viable, or if you’d recommend a different route.

Submitted by Alan - IRA critic on Thu, 2018-04-12 23:59

  • Yes, I have heard about Entrust for many years with no particular negatives, but your experience with them is surprising as the treatment of excess IRA contributions is the same for all custodians. It is possible that the fact there were no gains or losses is confusing them, but their code 8 is correct and inconsistent with the rest of the 1099R. Am somewhat concerned that they might change the 8 coding to a 1 or 7 instead of changing 2a to 0, so hope that what you have copies of indicates a specific return of your 2017 contribution was processed. An extension at this point is a good idea.
  • If you have not e mailed Entrust yet, suggest referring to code 408(d)(4) which applies to the return of contributions and the 1099R Inst refer to that section. While the 1099R Inst are hard to read due to several x references and exceptions, Entrust’s tax Dept should certainly know this stuff. Again, the code 8 indicates that they did not misunderstand your request to return the contribution.

Submitted by David McFarland on Mon, 2018-05-07 14:54

Alan – I didn’t mean to leave you in suspense on the outcome of this. The issuer finally corrected the error and submitted a new 1099R to the IRS. They changed block 2a to $0 and left it as a code 8. Thanks again For your assistance. It was truly appreciated!

Submitted by Jose Morales on Thu, 2018-04-12 19:05

Hello Allan,It’s been a while since I’ve stopped by the forum but I popped in today and saw this post.  I wanted to clarify one point, in the instructions for tax form 1099R the IRS instructs the filer to include corrective distributions and excess contribution amounts in box 2a.  Just after box 2a there should be Box 2b Taxable Amount Not Determined which should also be checked.  This of course leaves it up to the individual to determine the taxable portion of the corrective distribution (the earnings attributable to the excess contribution or excess deferral).  I’d advise the person in this situation to go back through the software step by step and make sure they aren’t missing the step where they note that the taxable amount was not determined by the issuer of the 1099R, which should then lead them through the steps of determining the true taxable amount of the distribution.  This is a very common “problem” that occurs when using DIY tax software.

Submitted by Alan - IRA critic on Thu, 2018-04-12 23:33

urusei – but this was a code 8, for which the taxable amount (the earnings) must be determined by the custodian and the “taxable amount not determined” box should not be checked. Same would apply to a Code P. In the 1099R Inst under Trad, SEP and SIMPLE IRA, there is a paragraph that starts “For a distribution of  contributions plus earnings from an IRA before the due date of the return under Sec 408(d)(4)” et al it states that only the earnings go in 2a.

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