Contributed $9k to Trad IRA in 2021, max allowed $7k, $2k minus net loss of $400 returned as excess in 2022 with Distr Code “P”
I over-contributed in 2021, meaning I contributing about $2k over the $7k limit to my Traditional IRA, for a total contribution of about $9k. I correctly deducted $7k on my 2021 return in April 2022. Prior to that, in January 2022, is when I realized that I over-contributed by about $2k in 2021. I only claimed the $7k as my Traditional 2021 contribution when I filed in April 2022, which was correct, but I did not provide any information to the IRS about the return of the excess, which I returned after I was contacted by the brokerage in January 2022 asking me to resolve this, when they noticed I went over the maximum allowable contribution for 2021. So I calculated the NIA , which was a loss (-$400), and had them to distribute the difference ($2,000 – $400 = $1,600) back to me as a prior year return of excess contribution, and the brokerage just issued my 2022 1099-R with a distribution code “P”. Do I need to report this $1,600 distribution, and do I need to amend my 2021 return? (I paid the correct tax because I only claimed $7k as my 2021 contribution.) Thanks in advance!
Permalink Submitted by Alan - IRA critic on Wed, 2023-02-01 19:29
If you had a gain on the excess, the gain would be taxable on your 2021 return, and you would have to amend it to report the additional income. However, with a loss all you would have done on your 2021 would be reporting 1600 on line 4a (not taxable) and with an explanatory statement about the excess and its removal. Most likely the IRS will see that there is no taxable income in Box 2a of the 1099R and there will be no inquiry. However, if you want to better document this to head off an unlikely inquiry, you would file a 2021 1040X with an explanatory statement regarding the excess and return of excess with a loss (dates and amounts). If you would rather not file the 1040X, just be sure to keep the 1099R with your 2021 tax records so in the case of an unlikely inquiry you could respond with a copy of the 1099R.
Permalink Submitted by ANDREW SANDLER on Wed, 2023-02-01 22:46
You know your stuff. After I posted, I called the IRS and they gave me the same answer. Thanks for corroborating. I will use this forum in the future, as the members are way more knowledgable than the TT forum.