Excess IRA contribution for 2 years LIFO Question

Submitted by Chris Pullen on Wed, 2024-02-14 23:23

I made excess IRA contributions for 2022 and 2023

$7000 for 2022 and $5000 for 2023.

I just withdrew the 2023 $5000 contribution with $175 earnings.

The 2022 $7000 contribution is still in the IRA making 5.5% as it is stuck in a CD.

Is it ok to just file my 2023 taxes with form 5329 reflecting a 6% penalty on the 7000 contribution and also send separately an amended 5329 for 2022 with another 6% penalty. Then report the $5000 distribution on 1040 4a and 4b as it was done before the deadline? I’ll take the $7000 out in November when the CD matures and report it with 2024 taxes with no penalty.

Or do I have to take the contribution out in order of Last in First Out ? Im only seeing that LIFO applies to multiple contribution made for the same tax year and not year to year.

Thanks



Submitted by Alan - IRA critic on Thu, 2024-02-15 00:49

  • TIRA excess contributions are more challenging than the more typical Roth excess. Is the 2020 contribution actually an excess contribution, or just non deductible? For TIRAs, the usual reasons for excess are lack of earned income, or contributing over the contribution limit. Not being able to deduct a contribution does not make it an excess contribution, but if you deducted the 2022 contribution and then remove it, you will have to amend 2022 to remove the deduction. There is also additional info the TIRA custodian needs to properly report your removal of a prior year excess after the due date.
  • You just incurred the 6% excise tax on the 2022 excess for a second time at the end of 2023, so there isn’t a rush to distribute it now, even if you could. Leaving it in the IRA until November will generate more CD interest with no additional excise tax, and any gains on the 2022 excess can stay in the IRA because you have been incurring the excise tax by not correcting by the due date. The $175 in gains you received for the 2023 excess removal will be taxable in the year in which you made the excess contribution, and even if you withdrew it in 2024, the distribution including the gain will be reportable on your 2023 return. There is no longer a 10% early withdrawal penalty on the gains. 
  • There is no LIFO rule for excess removals for years after the due date has passed. Form 5329 will show that distributions reduce the prior excess balance regardless of year. You will need a 2024 5329 to show that the excess has been eliminated, and no further excise tax due for 2024.

Submitted by Chris Pullen on Thu, 2024-02-15 00:58

TYI am 62 yrs oldI did generate a 1099-R with code P as the custodian wont send one until 2024.They are both excess as I had no earned income either year. . There was no deduction taken .The $175 earnings will be reported on the 2023 tax return.Its the late (2 periods) $7000 that I made in 2022 that will get withdrawn later in November of 2023 when the CD matures. The $5000 I contributed in 2023 plus $175 earnings was just taken out last week and understand that wont go on 8086 or 5329 (if withdrawn) but will end up on 2023 1040 line 4a as $5000 and line 4b as $175. I have to attach a statement explaining 4a and 4b. I have not filed 2023 taxes yet.But I understand the 5329 will be needed each year the $7000 stays in and when it reduced to zero..  

Submitted by Chris Pullen on Thu, 2024-02-15 00:59

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Submitted by Alan - IRA critic on Thu, 2024-02-15 22:30

Line 4a should be 5,175 and 175 is correct for 4b. 
When you request the distribution of 7000 in November, be sure to tell the custodian the distribution removes a 2022 excess contribution that you did not deduct and is being withdrawn subject to Sec 408(d)(5) as indicated on p 11 of the 2023 5329 Inst. As such the 1099R you will get for 2024 should not have a taxable amount in Box 2a as copied below:
•” For a distribution of excess contributions without earnings after the due date of the individual’s return under section 408(d)(5), leave box 2a blank, and check the “Taxable amount not determined” box in box 2b. Use Code 1 or 7 in box 7 depending on the age of the participant.” 

Submitted by Chris Pullen on Fri, 2024-02-16 12:36

TY For that corection. That was really helpful

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