Return of Excess Question
Hello,
I have a question on a return of excess calculation that I wanted to see if you had any thoughts on. The IRA transferred to my company 6 weeks ago and has not been invested and still in cash. While the transfer was in process the former custodian notified the client that there was an excess contribution of $3000.00 made on 12/04/2024 that needs to be removed. Custodian proved the account balance on 12/03/2024 and the total contributions for 2024 was $7000.
The question is when doing the calculation to see if there were any earnings on the $3000 since we know the beginning balance and ending balance and the total contributions and expenses, is there a need to include the amount of the transfer in the inflows and outflows since the amount would cancel each other out?
I don’t think there is any guidance from the IRA on this but I wanted to get your thoughts. Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2025-05-29 12:22
How did the former custodian determine that 3000 was an excess contribution? Could client have made a 2023 contribution earlier in 2024 that the custodian assigned to 2024? Or did client also make a Roth contribution for 2024? Always good to be sure that there is actually an excess contribution before removing it. The 2024 5498 forms should be received in the next week or so if the client has not already received them, and they would indicate the year and amount of any 2024 contributions.
To your question, when there is a change of custodians, the current custodian has flexibility if asked to remove an excess contribution. In this particular situation if the custodian will accept client’s statement of what the adjusted opening balance was immediately after the last 3000 was contributed to the former account, they could then determine the net earnings or loss for a return of excess using the current closing balance. The outgoing transfer would be ignored in this case because it was received by the current custodian who will be doing the calculation, creating an offset. Of course, if there were any other contributions or distributions to either account between the date the last 3000 was contributed to the former account and the date the removal is processed, they would have to be reflected in the opening or closing balances.