Return of Excess IRA Contributions

Technical topics regarding tax preparation.
#1
JCCPA  
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Hi All:

Apologies for any cross-posting, but, I am flummoxed and I'm having trouble resolving something.

Husband-Wife each had $6,500 Excess IRA Contributions in 2018.

Accordingly, they paid 10% Penalties on Form 5329 on their 2018 and 2019 Income Tax Return.

The Excess IRAs were Withdrawn during 2020.

Merrill Lynch issued two 1099-R's for 2020, one which I feel is Correct and one which I feel is Incorrect.

Why they are not the same, is....well....mind-boggling?

Wife's 1099-R Has: Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $0. Box 7, Distribution Code P, Excess Contributions.

Looked GOOD to me.

Husband's 1099-R Has: Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $6,500. Box 7, Distribution Code 1, Early Distribution.

UMMM....WHAT?

I shared this problem with Merrill Lynch, since, after all, they are the Custodian and Issuer.

First, THEY said, that, I have this backwards, the one that is "Incorrect is Correct" and the one that is "Correct is Incorrect," but, they aren't going to correct the Incorrect 1099-R."

UMMM....

....I essentially told M-L, "What are you talking about?" (but....well....maybe I'm wrong). But, still, both 1099-R's should be the same. I fail to see ANY of their logic.

After telling them this, their next Email states:

"You can only do a prior year and current year removal of excess. The contribution that needed to be removed was made in 2018 correct? The removal of excess was completed in 2020, with that being said they would only be able to remove 2019 and 2020 contributions as excess. Any other contributions would need to be removed as a normal distribution and be self-reported, I believe they can do this on the IRS form 5329."

They've referenced Pub 590-A Pages 33 and 34, which, doesn't seem to indicate this.

I've coded this on Form 5329, obviously, as "2020 Distributions of Prior Year Excess Contributions."

So, this is a mess.

I truly think that the Financial Advisor REALLY SCREWED UP with something originally on one of the Excess Contribution repayments, and he really, really doesn't understand ANY of this.

The Financial Advisor is interacting with M-L's Compliance Department and cannot even get his story straight.

This is my observation after reading through their long EMail chain.

Second, what about the EARNINGS on the Excess Contributions that were in the IRA?

If I am correct, wouldn't there be two additional 1099-R's for Reporting Taxable Earnings of the Excess IRA Contribution, as in, Box 1, Gross Distribution, $X,XXX. Box 2a, $X,XXX, $0. Box 7, Distribution Code 8 , Excess Contributions Earning? Not to mention, they should have withheld Federal Taxes. :oops:

This has just gotten out of hand AND I am exhausted with this.

Thanks in advance for any thoughtful responses.
Last edited by JCCPA on 12-Jun-2021 6:59am, edited 5 times in total.
 

#2
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If these were deductible traditional IRAs, I believe the excess in 2018 and 2019 should have been charged with a 6% tax on the excess contributions plus the earnings on form 5329. When the excess plus earnings were removed, there should be an amount on the 1099R box 1 as the excess contribution plus earnings and box 2a should have the exact same amount as taxable with a code P in box 7.
 

#3
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mammondee:

Apologies, I may have used a wrong word in the original post which I have just edited.

These IRA Contributions were attempted Traditional IRA Contributions.

Each Contribution EXCEEDED the Contribution Limit that year, which, was "0" due to Taxpayers' Income and participation in other Retirement Plans.

They were ineligible for either a Traditional, Roth or Non-Deductible IRA.

The Excess IRA Contribution, I meant to explain, means that they weren't even eligible to make ANY IRA Contribution, neither a Deductible IRA, Roth IRA or a Non-Deductible IRA.

They made the mistake of contributing to one anyway.

Therefore, they paid the 6% Excise Tax each year until they "Cured" and took the money back (withdrew) during 2020.

The original $6,500 deposit they each made was NEVER eligible to be deposited into any IRA.

Then they didn't Cure it after I told them when I did their 2018 Return and 2019 Return.

SMDH.

~JC
Last edited by JCCPA on 12-Jun-2021 7:00am, edited 1 time in total.
 

#4
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The more I "process this," I need to be clearer and to the point.

"Fact" Pattern:

A taxpayer withdrew their Excess IRA Contribution made in 2018. It was withdrawn in 2020.

They head earnings on the Excess IRA Contribution of $1,500.

The taxpayer SHOULD receive 1099-R's, as follows:

> 1099-R - Box 1, Gross Distribution, $6,500. Box 2a, Taxable Distribution, $0. Box 7, Distribution Code P, Excess Contributions.

> 1099-R - Box 1, Gross Distribution, $1,500. Box 2a, Taxable Distribution, $1,500. Box 7, Distribution Code 8, Earnings on Excess Contributions
Last edited by JCCPA on 12-Jun-2021 6:55am, edited 1 time in total.
 

#5
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I'm getting even more confused as you post. Why were they ineligible to make a nondeductible contribution to a traditional IRA? Had they made other contributions to a traditional or ROTH that put them over the $6500 limitation for each?
 

#6
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Yellowdog:

They were ineligible to contribute to any type of IRA (Traditional, Roth or "Non-Deductible" IRA) for 2018, due to their income levels and participation in other retirement plans.

In these situations, what they contribute becomes an "Excess Contribution" and must be cured or withdrawn from the IRA.

Until they withdraw it, they have to pay a 6% excise tax penalty every year on Form 5329.

Thank you for chiming in and reading through all of this.

It's much appreciated.
 

#7
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But why could they not make a nondeductible contribution to a traditional IRA?
 

#8
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JCCPA wrote:
They were ineligible to contribute to any type of IRA (Traditional, Roth or "Non-Deductible" IRA) for 2018, due to their income levels and participation in other retirement plans.


You keep saying this, but what reg are you using to say they could not make a nondeductible contribution to a traditional IRA? Were they over their $6500 limit for contributions to other IRAs, or is this indeed a ROTH subject to the income limitations?

Remember: Being able to contribute to a traditional IRA and being able to deduct the contribution are two different things.
 

#9
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Yellowdog:

Alright.

I guess I'm creating more confusion.

Trying to work through this M-L and client is exhausting, because frankly, neither of them understand this, and they have both told me so.

I'm unintentionally misleading this conversation.

Again, I'm sorry. I am thankful for your input.

Yes, in fact, the "Excess IRA" is also one in the same as "Non-Deductible IRA."

I just came into my office and am looking at the 2018 Return.

I prepared Form 5329 (for the 6% Excess Contribution penalty) and Form 8606 for 2018 to trace the same contribution which is "Non-Deductible."

Thank you, yellowdog.



For 2018,
 

#10
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If there is no limitation other than the fact that their AGI was too high to take the deduction for contributions to a traditional IRA due to being covered under employee plans, then there is no "excess contribution." They just have a basis in their traditional IRAs which will be accounted for on the 8606. Note this is assuming no other IRA contributions, Roth or traditional, that would make them exceed the annual limitations for IRA contributions.

When they take a distribution from the traditional IRAs, the taxable amount will be prorated on the 8606 with the nondeductible amounts taken into consideration.
 

#11
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So again to clarify your posts, the taxpayers contributed to traditional IRAs, but did not exceed the limits for contributions to all IRAs, i.e., $6500 for each taxpayer, for 2018. I will note I did not look up the maximum amount for 2018. I' m just going with your post.

Note this is a question posed as a statement.
 

#12
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Ok.

So, I'm learning a LOT about IRAs here, something that drives me crazy every year.

Perhaps there shouldn't have been any "Excess Contribution" in the first place on Form 5329 in 2020, and, well, this is messy well before they received Form 1099-Rs?

Yellowdog....in 2018, these these should have never been considered "Excess Contributions" and hence no Form 5329.

Yellowdog....in 2018 they should have been simply Non-Deductible IRAs on Form 8606.

They did not go over $6,500 each.

I am "getting" it now.

Something definitely went wrong here.

THANK YOU, yellowdog....

Apologies (again) for unintentionally misleading.
 

#13
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As long as the earned income was enough ($13000) for them to make the contribution, they could contribute $6500 each to a nondeductible traditional IRA.
 

#14
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Got it yellowdog!

You really made me work through this and lot more!

Very nice of you to kindly "teach" me something today. ☺.

I am looking through the file now. I have some old notes I am reviewing.

I will straighten all of this out.

-JC
 

#15
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Could EARNED INCOME, or the lack of it, be the problem?

Your posts don't indicate that since you reference other plans, but just throwing that out there.
 

#16
JCCPA  
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They had more than enough earned income.

They were both participants in work retirement plans.

That's why they became Non-Deductible IRAs, past the Deductible limits.
 

#17
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That's the way I was reading it, but wanted to cover bases.
 

#18
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Great, TY, you were leading me there!!!!
 


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