IRA withdrawal pickle

Submitted by Sharon Henry on Fri, 2023-12-29 06:24

I’m in a bit of a pickle.
In July 2019 I withdrew $30,000 from my traditional IRA.
I was over 59.5 years old and paid back $10,000 within 60 days, however the remaining $20,000 wasn’t paid back until May 2020.
Last year I was informed by the IRS that I owed $5,670.00 from 2019 for “pensions and annuities” of $20,000. I’ve never received a pension or annuity, so it must be the $20,000 from my IRA. This year the State of California Franchise tax board also sent a bill for $2,292.95 based on the edited tax return. (Total of additional taxes and penalties: $7,962.95.)
Now I am reading that because the $20,000 contribution (that I have not deducted) exceeds my $7,000 annual limit, it is liable for a 6% annual tax for every year since 2020. I haven’t taken deductions for any of the $20,000 contribution because I thought I was simply paying back the funds I had borrowed.
Do you have any advice on how to straighten this out?
Am I correct to understand that the $20,000 is going to be taxed three times. Once for the withdrawal in 2019 ($7,962.95). Second – the $20K I contributed in May 2020 was after-tax money and no deduction has been taken, and thirdly, it will be taxed when I withdraw it during retirement?
Thanks.



Submitted by Alan - IRA critic on Fri, 2023-12-29 15:39

  • Yes, the 20,000 distribution that was taxed and subject to underpayment penalty was your IRA distribution that was not rolled over within 60 days. After 60 days it was not eligible for rollover and became an excess IRA contribution for 2020 to the extent that the 20,000 exceeded your 2020 IRA contribution limit, For example, if you had earned income in 2020 of at least 7000 from which you could have made a 2020 regular IRA contribution but did not, you could apply  7000 of the late rollover as a 2020 contribution and deduct it if your income that year was not over the deduction limit. That would reduce the excess contribution to 13,000. But let’s assume you had no earned income in 2020,  making the entire 20,000 contribution an excess contribution. In that case you would owe the 6% excise tax for 2020-2023 on Form 5329 for each year. 
  • Unfortunately, it may be too late to withdraw the 20,000 this year, but if you could withdraw it today, you would eliminate the excise tax for 2023. This 6% excise tax is not an income tax. Any gains on the 20,000 over the last 3+ years is yours to keep. Do not attempt to withdraw any gains, just the 20,000,
  • Regarding actual income taxes, you were first taxed on the 20,000 when you took the distribution in 2019. When you request the 20,000 distribution tell the IRA custodian that this distribution is a return of an excess contribution for 2020 under Sec 408(d)(5), and they need to complete the 1099R accordingly. The 1099R should not have a taxable amount in Box 2a. Therefore, you are only taxed one time on this 20,000 plus the separate excise tax for 4 years, but the 20,000 will no longer be in your IRA.

Submitted by Sharon Henry on Sat, 2023-12-30 00:42

Incredibly helpful. Many thanks for your detailed response. I did have earned income, but my AGI was over the deduction limit. The IRA is in a Betterment account so I’ll see if I can make the request clear to them via email.Live and learn (and pay the consequences.) Thanks again.

Submitted by Alan - IRA critic on Sat, 2023-12-30 00:47

You could still apply 7000 of the excess as a non deductible IRA contribution if you wanted to reduce the 6% excise tax, but you would then have to track the IRA basis indefinitely on Form 8606. If you don’t want to do that, then you can treat the entire 20,000 as an excess contribution.

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