A taxpayer has made more than enough IRA contribution for tax year 2011. Is it true that he can withdraw part of the contribution out before 4/15/2012 without tax consequence?
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Check out this link
What if You Contribute Too Much?
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Thank you.Originally posted by Jesse View Post
What about if the withdrawal is not excessive contribution (For excessive contribution,I assume it means contribution over the maximum limit). But rather the taxpayer has only contributed more than what is needed.
For example, taxpayer only need $2,000 to get the maximum IRA deduction benefits. But he has contributed $3,000 by mistake. Can he withdraw the $1,000 without tax consequence before 4/15/2002?Comment
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Yes, with a caveat
YES - kinda......Originally posted by AccTaxMan View Post
Tax may be due on "the earnings" from the "bad" money - very complicated calculations but the investment firm should handle it and will likely issue a Form 1099-R. There could potentially be 2011 and/or 2012 taxable income based upon facts not yet stated here. HINT: I would not be hasty in filing the 2011 tax return.
The scenario mentioned is a completely different animal as opposed to "excessive contributions" which remain after the window of opportunity for the removal of inappropriate funding has closed.
FEComment
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I have just called the bank. Their representative said they would still consider it to be a distribution and issue a 1099 for it. I mentioned the IRS special rule about withdrawing before 4/15. They said it does not make a difference to them, they would still regard it as a distribution anyway and a 1099 would be issued. So in that case, the IRS computer would consider it to be a withdrawal and charge penalty on it because the taxpayer is under 59 1/2 years old.Originally posted by FEDUKE404 View Post
So is there a special way that we can take care of it in the tax return?Last edited by AccTaxMan; 02-17-2012, 04:01 PM.Comment
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Lots of work ahead
The Form 1099-R rules, and it IS a distribution.Originally posted by AccTaxMan View Post
From the link above, here is the relevant excerpt:
Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
You "take care of it" by trudging through a Form 8606, IIRC. The Form 1099-R will likely have a code "P" or code "J" or code "R" in Box 7. (Fortunately I have not had to face that ordeal this year, so I might be off on the codes.) As noted earlier, you could have taxable income for 2011 as well as taxable income for 2012. With an "up" stock market, and depending upon when the "bad" funds were placed into the account, quite likely both! Think of it as the clock keeps ticking until the funds and earnings are actually removed from the account..
The process is not for the faint of heart - you just have to get the publication and, with your software, fight through it. Even though it is still February, you might even consider an extension until all the facts are available (unless you prefer amended returns).
As for your call to the bank - I think their approach is 100% correct. There WILL BE a distribution - your job is to make the tax from such go away.
Oh yeah: Tell your clients if they are in a "maybe I can donate to my (traditional/Roth) IRA this year" situation, it might be to their betterment to show some patience before putting the funds into the account.
Good luck.....................................
FEComment
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TTB, p. 13-10Originally posted by AccTaxMan View Post
Start at the bottom of the left column, and then over into the right column, there is the procedure and a worksheet too.Comment
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Not exactly sure if it will work, but seems I have had clients request in the past. - Might depend on the date of the original contribution?
Request the Institution to re-allocate the 2011 IRA Contribution of $ 3,000 - so that 2011 contribution would be $ 2,000 and 2012 Contribution would be $ 1,000.
If that could be accomplished then there would not be a distribution.
SandyComment
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Might work, might not
That might work, depends on the "skills" of the investment person. I've encountered various levels of...."cooperation" depending upon how high up the food chain you can reach with the investment firm.Originally posted by S T View Post
In theory, if during 2012 you put funds into an account for 2011 and then prior to 04/15/2012 transferred them to a 2012 account, you are probably OK. That could fall into the "Oops!!" provision.
OTOH, if during 2011 you put funds into an account for 2011, and then prior to 04/15/2012 transferred (likely = "withdrew") them to a 2012 account, rules may differ.
Only the banker.....and the Form(s) 1099-R, know for sure.
FEComment
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Just looking at codes for 1099R. Code 8 says excess earnings / contributions taxable in 2012. Code P says excess earnings / contributions taxable 2011. Not sure I get the difference.Comment
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Code question
The difference is in which calendar year the income is taxable, based upon the applicable facts as discussed above.Originally posted by dan doshan View Post
In a situation where you removed "excess" 2011 funds yesterday, you can theoretically have taxable income for A, or B, or A+B.
FEComment
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That works only if the 2011 "excess" contribution was actually made in 2012. It will not work if it was made in 2011. But I have done the former many times.Originally posted by S T View PostComment
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Clarification needed
While I understand your point (highlighted above), if "you" did the change then exactly how do you get around the annual reporting issues for Form 5498??Originally posted by Burke View Post
It would seem there would likely be a conflict between what appears on the client tax return versus what gets reported to the IRS. It is my understanding that if, between 01/01/2012 and 04/17/2012 you make an IRA contribution, the institution will/must ask you to which year (2011 or 2012) said contribution is being applied. That's kinda why the 5498s don't show up until June or so.
(Sincerest apologies if I misinterpreted your post
)
FEComment
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