Excess contributions

Submitted by Shane Hall on Wed, 2018-12-26 17:05

I have a client that converted a solo (k) to a Traditional IRA in 2017. In 2018 he started a Safe Harbor (k), as he added full-time staff. The problem is that in December of 2017, the Solo(k) was converted to the Traditional IRA, and upon filing his tax return in October of 2018 it was discovered that he over-contributed to the Solo(k). He now needs to remove the excess contribution, but it is sitting in the IRA. Can the excess be pulled from the IRA to satisfy the IRS? Should he remove from his Safe Harbor account even though those contributions were for 2018? Any help would be greatly appreciated.



Submitted by Alan - IRA critic on Wed, 2018-12-26 22:55

  • Since the extended due date for the 2017 return has passed, the IRA custodian should be asked to distribute the 2017 excess amount rolled into the IRA per Sec 408(d)(5) based on incorrect rollover information from the 401k plan. The 1099R generated should have a blank Box 2a, because the excess amount should have been reported as taxable on the 2017 return. In other words, the excess amount and earnings distributed from the solo K being taxed in 2017 would not be double taxed when distributed from the IRA in 2018 or 2019. The terminated solo K plan should correct the 2017 direct rollover 1099R to break it into two forms – a 1099R coded G for the eligible rollover amount and another 1099R coded E to report the excess amount as taxable income and this should conform to the 2017 1040 taxable income.
  • While the IRA removal of excess will be non taxable, there was an excess IRA contribution for 2017 and also 2018 if the withdrawal is not done by 12/31. Therefore, Form 5329 will be needed to pay the excise tax for 2017 and 2018 (if applicable), and also a 5329 for the year the IRA distribution is completed showing resolution of the IRA excess. The 5329 will apply the excess as a regular TIRA contribution for any of these years where there is room for a TIRA contribution.

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