Excess IRA contribution withdrawn and 1099R issued

[Bonnie]

April of 2014 taxpayer contributes 5500 to a traditional IRA as a designated contribution for 2013. Less than a week later he realizes he had also contributed 2000 to his Roth IRA in 2013 so calls USAA to get situation taken care of. USAA refunds 2000 of his contribution and we claim 3500 on his 2013 tax return as an adjustment to income. He is told by USAA that it's as if the contribution was never made because of the short time it was in his account and there were no earnings. But they issue a 1099R for 2014 showing a 2000 distribution and showing 2000 as taxable. They are telling him to account for this on an 8606. I've never had this situation happen and cannot find anywhere on the 8606 to show what has happened. He did not receive any benefit for 2013 for this contribution because we only claimed 3500. What am I missing. Can't figure this out.

[FEDUKE404]

Accounting for the withdrawal

I'm rather curious as to how you claimed the excess funds as an "adjustment to income."

In most cases the Form 1099-R rules, and you must pay careful attention to the amounts shown and the alphanumeric codes provided. I might even suggest going into the Q&A mode with your tax software for that aspect of the tax return.

Technically there likely was a (nontaxable) 2014 distribution of the excess funds, and so a Form 1099-R had to exist somewhere. My guess is there was actually an (overlooked?) *2014* Form 1099-R ?

Also, the fact that client apparently moved funds from a Traditional IRA to a Roth IRA is a different animal than merely removing "excess funds" by the April 15th deadline.

You might want to chase down the 2013 Form 5498 to see what is shown?

Good luck. I've had way too many of these situations with creative clients (don't even get me started on recharacterizations and then reversals of same. . . )

FE

[Bonnie]

He did not move any funds. He just withdrew the 2000 from the traditional. The 2000 contribution to the Roth is still in the Roth account

[Roland Slugg]

The bank was correct to issue form 1099-R but was incorrect to tell him to account for the distribution on F-8606. He does not have to file F-8606, but what's interesting is that the instructions for that form do explain what to do when the situation you described occurs. Please see the instructions for F-8606, page 5. This might also be covered in IRS Pub 590-A or 590-B.

Since the $5,500 was contributed in April 2014, instead of withdrawing the $2,000 excess he could have just advised the bank/trustee to re-designate $2,000 of that $5,500 as a contribution for the year 2014 ... if he believed he would want to make an IRA contribution for at least that much for the year 2014 and would be eligible to do so. Much easier for everyone.