Excess Contribution in a Traditional IRA, WIthdrawn Before Deadline, Form 5329 Instructions, H&R Block Software

Submitted by PETER DIFORTE JR on Mon, 2020-02-10 02:06

I made an excess contribution in 2019. I withdrew the excess contribution via my broker in January 2020, and assigned it all to 2020. I calculated a loss on the original contribution, and thus no earnings were withdrawn.

1. My broker stated that I will that NOT receive a 1099-R in 2020 (for the 2019 excess), but will receive a 5498 (for 2019) in May 2020 showing the 2019 contribution.

2. With everything I’ve read online, it states that I must complete a Form 5329 to report the 2019 excess to the IRS.

3. I withdrew the 2019 excess before the April 15, 2020 deadline, and I believe I do not have to pay the 6% penalty.

4. Question 1: How do I complete Form 5329 so that I do not pay the 6% tax?
Catch Up Contribution 2019 = $7,000, Withdrawn from 2019 = $6,980 and re-assigned to 2020 same IRA account

5. Question 2: Next year in 2021, will I need to fill out another 5329 to re-assign the IRA contribution/deduction for 2020?

6. Question 3: How do I “activate” a 5329 form in H&R Block software. I entered $7,000 for the IRA which was not deductible due to the income, and the software created a Form 8606 (ira basis). BUT it does not allow a withdrawal of excess anywhere in the interview process or forms that I can find.

Any help is greatly appreciated! There a countless articles on the subject but no real instructions on a 5329 (and the irs instructions seem to imply not to report the 2019 contribution which I think is incorrect).

Thank You Very Much!



Submitted by David Mertz on Mon, 2020-02-10 03:06

Since you resolved the excess before the due date of your tax return and there was no taxable gain that accompanied the returned contribution, there is no reporting to be done on Form 5329 regarding this.  All that is needed is to include the gross amount of the distribution, $6,980 on 2019 Form 1040 line 4a, exclude it from line 4b and include with your tax return an explanation statement describing the return of contribution similar to the way you described it here.  You’ll receive the corresponding 2020 Form 1099-R near the end of January 2021, but since you will have already included it with explanation on your 2019 tax return you can just ignore that 2020 Form 1099-R.

Submitted by Alan - IRA critic on Mon, 2020-02-10 03:25

DMx is correct in how to report what you have already done on your return. However, it sounds like you did NOT have an excess TIRA contribution. Rather, you decided to remove the contribution because your income was too high to deduct it. If so, there were other options you could have exercised. The first would be to recharacterize it as a Roth contribution if your income was not too high for that also. The second would be to report the contribution as non deductible on Form 8606, and if you do not have any other pre tax TIRA balance, you could then convert the contribution to your Roth IRA tax free (dubbed back door Roth). But perhaps you are only interested in making a contribution at all if you can qualify for the deduction?  Is that the case here?  Not clear what you are trying to accomplish, since depositing the removed contribution as a regular TIRA contribution for 2020 just sets you up to repeat this process if your 2020 income is also too high for a deduction.

Submitted by David Mertz on Mon, 2020-02-10 04:55

Good, point.  If the software wasn’t indicating an excess contribution, it apparently was not an excess contribution but simply nondeductible.  Still, with no gain that would have been required to accompany the returned contribution, there is nothing to report on Form 5329, and with the contribution having been returned, there is no nondeductible contribution to be reported on Form 8606 either.  If the H&R Block software is similar to other software I’m more familiar with, the software probably won’t ask how much of the contribution you had returned unless it was actually an excess contribution, so you’ll simply need to omit the contribution entirely.  The return of that contribution and the fact that there was an attributable loss rather than any gain makes it as though the contribution was never made (other than the fact that there was a loss which can’t be claimed anywhere).

Submitted by PETER DIFORTE JR on Tue, 2020-02-11 02:21

You both have great expertise concerning this topic!

  1. I sold a property in 2019, and the capital gain is what bumped my income up (losing the deduction).
  2. My income will be pretty low in 2020 (small pension).
  3. The H&R Block software did create a Form 8606.
  4. I originally thought that re-characterizing to Roth would be too complicated for me, and had presumed irs reporting within a single ira account would be extremely simple, and I could deduct if for 2020.
  5. Just as an FYI, the H&R Block software is pretty rigid.  I’ll figure it all out, but I believe I have to remove the IRA contribution for 2019 to get Form 8606 deleted, and then report a distribution (no 1099-R) using a manual entry in the interview wizard.

Per your recommendations:

  • Form 1040 Line 4a = $6,980 (distribution) and 4b = $0  (taxable amount)
  • Follow Up Question 1:  Is an IRS statement just an explanation, my signature, and then stapled to the top of all the irs forms with I file?  I presume the software can’t create statements for electronic filing.

Concerning tax consequences for 2020:

  • Follow Up Question 2: Can I deduct the $6,980 (withdrawn) excess as a traditional IRA contribution for 2020?
  • Follow Up Question 3: If yes, for 2020, do I just enter $6,980 H&R Block software and make sure it populates to Form 1040 Line 32 as an IRA contibution?
  • Follow Up Question 4: Will ignoring a 1099-R in January 2021 cause any IRS red flag for not reporting a distribution?  I think I’ll have another 5498 too in May, 2021.

Thank you VERY much for your help and expertise!  It’s GREATLY appreciated!  I have seen conflicting information everywhere with no practical instructions at all.

Submitted by David Mertz on Tue, 2020-02-11 02:55

  1. Some software can include the explanation statement in the e-filing.  However, with the need to omit the IRA contribution entirely and not having a Form 1099-R to enter, attaching the written explanation to your mailed tax return is probably what you’ll need to do.  Just include the explanation statement as a separate full page, don’t staple it to anything.  Mailed tax returns get scanned.  Note that to get the amount to appear on line 4a, some software requires you to enter the code P Form 1099-R as if you have already received it.  I don’t know if that’s necessary with the H&R Block software.
  2. You said that the $6,980 was deposited as part of your 2020 traditional IRA contribution (“assigned to 2020”).  Assuming that you are still covered by a workplace retirement this contribution will be deductible if your modified AGI for 2020 is below the phase-out range.
  3. When preparing your 2020 tax return next year you’ll enter a $6,980 traditional IRA contribution.  (If you want to you can contribute an additional $20 to bring the total contribution for 2020 up to $7,000, in which case you would enter $7,000.)
  4. The explanation statement you provide with your 2019 tax return takes the place of the code P (along with code 1 if you are under age 59½) 2020 Form1099-R, so there is no need to do anything with that Form 1099-R when you receive it other than to keep it with your tax records.  Also, by including the $6,980 on line 4a you are reporting the distribution.  Code P means reportable on the previous year’s tax return, which you are doing.

Submitted by PETER DIFORTE JR on Mon, 2020-03-02 17:34

Good afternoon, I had dropped this tax issue for a few weeks due to the stress.  This post, by far, has provided the most accurate and reliable information concerning my tax situation.

  1. Just a FYI, the H&R Block Software does seem to allow an excess withdrawal for my situation.  The user creates a 1099-R manually and is then asked the relavent questions.  For 1099-R box 7, entering “none” for the code seems to change the interview and you can then enter “it’s a return of a contribution in 2019” and an IRS Statement Form appears.  Line 4a/4b are correct on the 1040.  I think I can file electronically now.  I cannot replicate this manual 1099-R entry from a backup file and get the same results, but I should be all set with this.
  2. But now, here are the results of tax angst and impetuousness due to conflicting information from online resources and a couple of phone calls (brokers, irs instructions, tax software help pages, etc).
  3. I had calculated the $20 loss from the original $7,000 IRA deposit in 2019.  Due to my confusion with posting dates and the date I had removed the excess (mid-January), I am concered that I should have removed $6,930 and not $6,980 (a greater loss from the original $7,000).  Several reputable pages online “greatly implied” that the withdrawal date for calculating the earnings should be the account value on the date of withdrawal request (ie, January 20, 2020 vs. December 31, 2019).   I (of course) should have instructed the broker to calculate the income/loss on the withdrawal, but did not.
  4. Follow Up Question 1: Is there any easy way out of this mess?  Do I ask my broker to calculate the loss for me (re-submit request, if possible)?  Do I use 12/31/19 or use the date the excess was requested to be withdrawn in the first place and then some other form for the possible $50 difference?
  5. Follow Up Question 2 (#2 above):  I am not covered by a 401k in 2020 (I’m unemployed and receiving a small pension).  Can I still use the deduction in 2020 for the excess contribution (more correctly the 2019 non-deductible contribution) that was moved to 2020?

I am a “poster boy” for making every mistake possible on a simple matter (making a non-deductible traditional ira contribution in the first place).  Your recommendations have been the most accurate–I had paid for H&R Block support and will not use it–and I greatly appreciate your help which has been a public service for me.

Submitted by Alan - IRA critic on Mon, 2020-03-02 19:11

      Before addressing your questions, you need to be sure how that distribution of 6980 was coded by the custodian so that the 1099R issued next January does not conflict with what you are reporting now when doing your 2019 return. The concern is that you indicated that YOU calculated the gain/loss on the contribution, whereas the broker normally does this. Take a look at the IRA account statement and see how this distribution was described. You want to see that it was described as the return of your 2019 contribution, corrective distribution etc and NOT that it was a normal or early distribution. Put another way, if you calculated some figure such as 6980 or 6930 and simply requested a distribution of that dollar amount, then it’s not going to be reported the way you wanted on the 1099R next January. I don’t want to just assume that this was done correctly and then have the 1099R next year creating major problems. Please confirm regarding the actual removal transaction.

Submitted by PETER DIFORTE JR on Tue, 2020-03-03 01:51

I am completely over my head at this point, and may be using incorrect tax language or terms.  Pardon my restating the facts as it may clear things up.

  1. I completed a broker removal of excess form for the original $7,000 2019 contribution to my traditional ira.  I never received a check from my broker, they just added the $6,980 as a contribution for 2020.  2019 still shows a $7,000 contribution on the IRA summary page.  I am concerned that the amount that I calculated should be $6,930 due to ignorance on dates used which I believed were correct but may not be (for the earnings calculation).
  2. I had asked my broker about IRS forms just prior to creating this post.  Their response was:  “[You have] a tax deferred account and you only receive Tax Form 1099 R if you take a distribution and I confirm that you did not. However, you did make a contribution of $7,000.00 and you will receive IRA Tax Form 5498 in May-but, you don’t need the form to do your taxes because the last day to make a contribution is April 15 2020 for 2019 year. Once again, this email is to confirm, you will receive IRS Tax form 5498 and not 1099.”
  3. In my account, two transactions are labeled as “INTERNAL TRANSFER OF CASH” with a value of $6,980 and $-6,980.
  4. Does this answer your question?  H&R Block software requires a “fake” 1099-r to create the values on lines 4a/4b on the 1040 form.  It’s the only way to get those fields to populate, and H&R Block’s support was incorrect relative to your recommendations.
  5. If this anwered your question, I still have an issue with validating the transfer amount.  I was hoping you’d say “this happens all the time, your broker will recaculate it for you.”  I never conceived this would be complicated, but I impetuously made mistakes all along the way.  A comedy of errors as they say.

Thank You again. 

Submitted by Alan - IRA critic on Tue, 2020-03-03 03:12

  1. Yes, but this is not material to my question. Your 7000 contribution will continue to show and will be reported to the IRS on Form 5498. Taking that 6980 and using it for your 2020 contribution is OK. Am not concerned whether your calculation of loss is correct or not, I am concerned the custodian will not report the 6980 as a returned 2019 contribution which will show the1099R code as P, but rather as just an ordinary distribution of 6980.
  2.  Correct answer, but not to the question I am asking.
  3.  Now we are getting closer, but there is no indication that a 2019 contribution was returned with earnings. Sounds ominously like an ordinary distribution.
  4. Am trying to be sure that the dummy 1099R will duplicate what they actually issue next January. To cut through all this detail, suggest you call them and simply ask what code will be on the 1099R issued next January for the 6980 distribution. Just hope it’s P. Would also help to know if you were over 59.5 when the 6980 was distributed. If so, the code should be P1. Once we know that this 1099R will be coded P, the dummy 1099R instructions should be easy.
  5.  Put another way, my concern is that because you tried to do the calculation yourself and gave them the 6980 figure, that they they understood what you wanted, which was a return of your 7000 contribution for which they would usually use their software to calculate the earnings. I assume that they did not ask you to do the calculation yourself. Anyway, asking what code will be on that 1099R to be issued next January should clear this up. They know the code now, because whoever processed the distribution would usually code it now for the tax Dept to issue the 1099R next January.
  6.  Does the broker work for the IRA custodian, or are they independent? 

Submitted by PETER DIFORTE JR on Thu, 2020-03-12 17:03

My broker is one of the big three “zero commission” companies, and the custodian I believe.  I had emailed specific questions about 1099-R  coding for 2019 and 2020, and received the following response (paragraph numbers are inserted to make it easier to read): 

  1. “You will receive a Form 1099-R for any year in which you make a distribution from your IRA. [The brokerage company] is able to make the calculations needed to process your excess removal. Just notate on the attached form that you want [brokerage company] to make the calculation.
  2. The way your excess contribution removal is coded on your 1099-R will depend on a number of variables. Line 7 will have Code 8 if the excess removal is taxable in the current year. If it is taxable in the previous year, Code P will apply. Additionally, Code 1 will apply if the IRA owner is under 59.5. Please note, please consult your tax advisor to confirm how your removal will be treated under IRS rules after the removal request has been processed.
  3. If your excess contributions remain within your IRA account, the excess of funds contributed can be moved to a taxable brokerage account or to a bank account by using the attached Removal of Excess form. A removal of excess is the process of taking out disallowed or unwanted deposits to an IRA or Coverdell ESA account, such as over contributions, ineligible rollovers, or failed conversions.
  4. The removal of excess deadlines is October 15 of the following year the deposited funds were made in the retirement account.”

QUESTION: I am completely confused, as it appears I can resubmit a removal-of-excess form.  I was told by the broker (previously, quoted above) that I “did not” have a distribution, but this reply implies I that “did” make a distribution (supporting your concern).  Reading this recent reply, is there an easy way out of this mess?  I will call the broker this time, they’ve been overwhelmed recently.  I am 57 years old.  Thank You Again.

Submitted by Alan - IRA critic on Thu, 2020-03-12 23:17

Submitted by PETER DIFORTE JR on Sat, 2020-03-14 19:08

I hope you are doing very well, and appreciate your help.  After quite a long time on hold, I was able to get through to my broker!

  1. Jan. 2021, Tax Year = 2020, Form 1099-R, Box 7 Code = “P1”
  2. May 2021 (presumed), Tax Year = 2020, Form 5498, Regular Contribution, Code = “C1”
  3. The removal-of-excess form “cannot” be resubmitted for the broker to calculate earnings.

Summarizing things, I am 57 and will have low income in 2020.  I had sold a piece of real estate in 2019 which made my $7000 ira contribution non-deductible for 2019.  I submitted a removal-of-excess form to my broker in mid-January 2020, and they hopefully “re-assigned” the contribution from 2019 to 2020.  A 1099-R and 5498 will be mailed to me in 2021 for year 2020 with the codes listed above.  For 2019, I will report $6980 on Form 1040 Line 4a, and $0 in Line 4b.  And lastly, I have a concern that due to a possible error I made in calclulating earnings, the number might be $6930 +/-.  I am the “poster boy” for “impetuousness” and learned the hard way!  Thank you so much for all the help!

Submitted by Alan - IRA critic on Sat, 2020-03-14 22:19

OK, that is what you wanted, since P1 means that your 2019 excess contribution has been removed less a small loss. That amount was then used to make your 2020 regular TIRA contribution in the same amount (6980). You do not need to file Form 5329 for 2019, since the contribution was removed and the earnings were negative. For your 2020 return, you will either qualify to deduct the contribution, or you could report it as non deductible. But if you again choose to remove the 2020 contribution, do not try to calculate the earnings. Let the custodian do it.

Submitted by PETER DIFORTE JR on Fri, 2020-10-30 19:52

2020 has been a crazy year!  I hope you and your family are safe and healthy.  I cannot stress how helpful both of you were back in February, with incredibly accurate advice.  I filed my 2019 taxes with no issues.  Thank You!  Being the poster boy for impetuousness, and due to a small pension for 2020, I had signed up for Obamacare in December 2019.  I spent a lot time researching it, but didn’t research the rules regarding minimum income.  Due to the $6,980 2020 TIRA Contribution/Deduction (the 2019 Excess), my income now apparently falls into an area that is above the Poverty Level, but is in the Medicaid range, and I may not quailfy for the Premium Tax Credit for 2020.

  1. My income for 2020 will be about $20,800 ($19.5k Pension + Taxable Interest + Small Business Income).
  2. I believe the Obamacare minimum income level is $17,700 to qualify in 2020.
  3. My AGI would be about $13,910 with the TIRA deduction ($20,800 minus $6,980).
  4. [ $13,910 appears to make me ineligible for Obamacare, and I would owe back the PTC. ]
  5. [ $13,910 is above the poverty level, but falls into the Medicaid range below $17,700. ]
  6. [ I would likely not qualify for Medicaid due to assets I need from age 57 to 59-1/2. ]
  7. [ I did not claim the $6,980 deduction on healthcare.gov thinking it was not necessary. ]
  8. QUESTION 1: Can I “not” deduct the 2020 $6,980 TIRA Contribution (the 2019 Excess)?  This would bring my AGI “above” the minimum income to qualify for Obamacare.  Is this ok with the irs and Obamacare?
  9. QUESTION 2: Alternatively, should I close-out/distribute an old 401k that has $13k balance?  With the 10% penalty waived in 2020 (I’m 57), and being in a lower 12% tax bracket, I’d end up paying about $900 of the PTC back (I believe), and about $450 for the 401k Distribution (offset by the TIRA deduction).  This seems to be a cheap tax burden to close out a 401k which eliminates a lot of stress for 2020 taxes and retains much of the PTC.

The impact of “one” mistake is amazing!  I had bought some of the Ed Slott e-books online but haven’t read them yet, I’m hoping to make my taxes simple in the future and never need them.  I am a “case study” on why people should always hire a CPA!  Thank You so much again! 

Submitted by David Mertz on Fri, 2020-10-30 20:52

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