20180Return of Excess Question

Submitted by Kevin O'Hearn on Thu, 2020-03-19 12:49

Hello, I have a client that contributed to much to their IRA in 2018 and we are doing a return of excess to remove it. I known we don’t need to do a calculations to remove any earnings and it will be reported as an “age based” distribution. However, my client is questioning why no earnings calculations needs to done. Is there any guidance out there that states why you don’t need to calculate the earnings on this? Any feedback would be greatly appreciated.

Thank you.



Submitted by David Mertz on Thu, 2020-03-19 14:48

There is no specific guidance on this from the IRS.  However, the fact that after paying one or more 6% penalties one can apply the excess as part of a future-year contribution (if eligible) without any regard to earnings means that obtaining a regular distribution of just the excess after paying 6% penalties should also be free of any requirement to adjust for gain or loss.  (With regard to earnings, applying the excess as a future-year contribution is equivalent to taking it out as a regular distribution and then recontributing it.)

Submitted by Alan - IRA critic on Thu, 2020-03-19 15:07

  • Sec    408(d)(4) describes the return of excess with earnings by the due date with extensions (10/15/2019 in this case). After that date Sec 408(d)(5) describes the return of the excess ONLY, with no mention of earnings. 
  • The IRA custodian is only allowed to calculate the earnings and code the 1099R with the applicable code if the corrective distribution is made by the 10/15 deadline.
  • Once the deadline is missed, the 6% excise tax is incurred for 2018 and should be reported on Form 5329 for 2018. For 2019, the excess can be applied to the 2019 contribution if no 2019 contribution is made and that would eliminate the excise tax for 2019. In that case, the excess would not need to be distributed since it would no longer be an excess. If client already made a 2019 contribution, the client could request the return of the 2019 contribution with earnings which are probably negative now) to make room to apply the 2018 excess to 2019. SInce that eliminates the 6% excise tax for 2019, it might be worth considering, particularly since a regular distribution would probably be taxable and subject to penalty if over 59.5. 
  • If client deducted the contribution in 2018, a 1040X must be filed to eliminate the deduction. However, if the 2018 excess is applied to 2019 and client qualifies for the deduction in 2019, it can be claimed on the 2019 return. 
  • In short, if he can deduct the assigned 2018 excess in 2019, he is probably better off to remove the 2019 contribution with earnings, and not make a regular distribution as originally planned. That would eliminate a second excise tax year (2019) as well as a taxable distribution. If client cannot deduct a 2019 contribution due to income limits, then he might not want to track non deductible contributions forever.
  • As you can see, this is much more complicated than an excess Roth contribution. Are you sure this wasn’t a Roth contribution in 2018?

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