Removal of excess with an attributed gain or loss
Say someone contributed $5,000 to a Roth in 2024, but in 2025 realized they weren’t eligible to do any Roth contribution. There is a $500 gain attributed to that contribution that is withdrawn, for a total of $5,500. I’ve always thought the gain was considered income for the year in which the contribution was attributed, but a different forum post on this site led me to think the $500 is taxable based on the calendar year when the 2024 contribution was actually made, which could be either 2024 or 2025. Is that right?
Secondly, say there was a $500 loss attributed to the contribution, so just $4,500 was withdrawn. The 1099-R would only show the $4,500, even though it was a $5,000 contribution and $500 loss. My understanding is the $500 is deductible on Schedule 1, line 8z – but in which year, the year the contribution was made for, or the year in which it was actually made (early 2025 for 2024)?
In the Schedule 1 instructions and IRS Pub 525 on this topic, they seem to make a distinction between “excess deferrals” and “excess contributions”, which I assume refers to employer plans and IRAs, specifically. Do you believe the reporting of attributed income and loss are different, based on the type of plan being used?
Permalink Submitted by Alan - IRA critic on Thu, 2025-02-13 17:05
Yes, any gain on the return of excess will be taxable for the year IN WHICH the contribution was made, and the 1099R will be coded to identify the year. And in a case of a partial excess, the last contributions made are treated as the excess contributions. Therefore, it is possible to end up with two 1099R forms, one for the return of contributions made in different years.
If there is a loss, then there are no gains on which to be taxed. There is no deduction for any part of a returned contribution, as the contribution is treated as if never made. You may be thinking about a recharacterized contribution from a Roth to a TIRA, in which nothing is returned, but the TIRA contribution may or may not be deductible. If a 5000 Roth contribution was recharacterized, but due to loss only 4500 was transferred to a TIRA, then if the taxpayer qualified to deduct the contribution, the deduction would be for the full 5000.
An IRA only has excess contributions, but a qualified plan might have excess deferrals, excess contributions, excess aggregate contributions etc. each with different tax rules applying to returns of excess.
Permalink Submitted by Tim Steffen on Thu, 2025-02-13 17:22
Thanks Alan. Here’s the excerpt from Pub 525, page 11 that refers to deducting the loss:
Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8z, and identify it as “Loss on Excess Deferral Distribution.”
This whole section in Pub 525 refers to “deferral”, which makes me think it’s only for an employer plan. Or does that mean it’s only for a deductible contribution (plan or IRA)? In the case I’m working on, this was for a Roth contribution – so you’re saying no deduction for that loss? That’s intuitively what we thought, but this section had us rethinking. It also says the loss is deducted in the year you receive it, not the year you made the “deferral” – again, just a plan thing maybe?
Permalink Submitted by Alan - IRA critic on Thu, 2025-02-13 17:38
Yes, an excess deferral is only for an employer, non IRA plan. For a Roth IRA or TIRA excess contribution return, there is no deduction for the loss which diminishes the amount returned.
IRA returns of excess are not covered in Pub 525, they are in Pub 590 A. Excess contributions covered in Pub 525 refer to qualified plans where the taxpayer must remove contributions due to failing discrimination testing in the plan. This income is taxable in the year the return is made, typically the year following the contribution.
Permalink Submitted by Tim Steffen on Fri, 2025-02-14 12:39
I was afraid you were going to say that. Okay, thanks again Alan.
Permalink Submitted by Tim Steffen on Fri, 2025-02-14 16:06
So more on this one – 590A says you can remove the excess contribution up to 6 months after the due date of your return, with extensions. Say you made a $2,000 excess contribution for 2023, and you withdrew $2,500 (incl income) as a correction.
If you don’t actually extend the 2023 return, is your deadline 6 months after April 15, or can you get Oct 15 + 6 months regardless of whether you actually extend?
So in that case, your deadline is really April 15, 2025 to fix this?
If the excess was for 2023 but was made in 2024, and you correct it after filing the 2023 return, there’d be no reason to amend the 2023, right? The $500 of attributed income would be taxable in 2024 (the year the contribution was actually made).