TP (age 65) contributed to IRA 9-20-2012 $5000. TP filed proper extension. Upon working on return I find that due to a large distrbution from an estate on SCH-K! makes his IRA non-deductible. Can we withdraw the $5100. now in the IRA, pay the Tax on the $100.00 on the 2012 tax return and put the $5100 in an IRA for 2013. Will not have large distribution form estate in 2013? TP has enough EI to cover this in 2013 as he is still working. What do you think? Thanks
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There are a couple of statutory ways to un-do an IRA contribution:
1) If it is an excess contribution, you have until the due date plus extensions to withdraw the IRA tax free. The problem is an excess contribution is one where more than the allowable amount by statute is contributed during the year. It does not apply if the contribution is allowable based upon the taxpayer’s earned income, regardless of whether the contribution is deductible or not.
2) You can recharacterize the contribution from one type of IRA to the next. For example, you could recharacterize it from a traditional IRA to a Roth IRA. The AGI phase-out rules for Roth IRAs are higher than that for non-deductible IRA purposes. You can recharacterize a contribution anytime up to the due date plus extensions for the year the original contribution is made.
3) If the taxpayer does not have any money in any traditional IRA at the time of the contribution, and the contribution turns out to be non-deductible under the phase-out rules, then withdrawing all of the money can be done anytime tax free under the IRA basis rules (you still pay tax on the earnings). -
Futher discovery. TP has IRA at a bank and this particular IRA at a brokerage firm with several other IRA,s. We can identify which account this IRA went to. Will this make a difference? I think maybe because of the whole. May be better to convert this to a roth and leave it alone.Comment
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If you're still within the time period to recharacterize this as a Roth, then that may make sense. But if you're past that time frame, it's less clear what the benefit is.Originally posted by TAX4US View Post
If it has to be treated as a distribution, then the fact that there are multiple other (presumably traditional) IRAs implies you can't merely withdraw the $5100 and only pay tax on the $100 increase in value. Instead, you must use Form 8606 to figure the $5000 (and any other non-deductible contributions in the past) as a percentage of the total value of all IRAs for this person, and use that to determine the amount that isn't taxed on withdrawal. You'll still be left with basis in the remaining traditional IRAs, so this won't save on bookkeeping.Comment
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See Page 13-10 in TTB
See Page 13-10 in TTBComment
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Information on that page is talking about excess contributions. Nothing in the original post suggests this was an excess contribution.Originally posted by Kram BergGold View PostComment
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