IRA - Did I do this right

[HBurkholder]

TP stopped by to pick up his finished return several days ago. I said " Uncle Sam is hitting you pretty hard this year with the withdrawal from you IRA." "Oh" he said " I put that back into the account within 60 days" Last year he had a distribution that he "reinvested" within 60 days and I called it a rollover. Turns out this client is "borrowing" money from his IRA by reinvesting within 60 days. His distribution last year was actually two distributions, both of which were repaid into the same account within 60 days. In researching it seems that

(1) You can take a distribution once a year without penalty if it is reinvested in the same or another IRA within 60 days.
(2) You CANNOT take a distribution without penalty if you have previously taken a distribution from that account within one year.

I called his withdrawal an early withdrawal on which he had to pay a penalty. I then called his "redeposit" a contribution which at his income level gave him some tax credit, however he was over the allowable level so had to pay a penalty for excess contributions, Poor fellow was getting hit coming and going. He had to pay approx $700.00 more tax than if I would have called it a rollover. Pitied the poor fellow as he doesn't make that much money but "rules is rules"

Did I handle this right or did I miss something?

Also wondering about this practice of withdrawing and reinvesting within 60 days. Seems this is allowed - but borrowing from your IRA is a prohibited transaction.

[erchess]

What am I missing here?

Why did you call the redeposit a contribution? I understand why, if he made an excess contribution, you claimed the tax savings and penalty. But would he not have been better simply taking the hit for the distribution and ignoring the fact that he put it back? I am pretty sure he can do that.

Also you might want to help him understand that he would be better off borrowing from his bank or credit union than from his IRA.

[BP.]

missing something

I called his withdrawal an early withdrawal on which he had to pay a penalty. I then called his "redeposit" a contribution which at his income level gave him some tax credit.

Wondering how the contribution "gave him some tax credit" (assuming retirement savings contribution credit, form 8880) when there was also a distribution. Didn't the distribution disqualify the credit?

[HBurkholder]

Why would you do that

[QUOTE=erchess;35637]Why did you call the redeposit a contribution? I understand why, if he made an excess contribution, you claimed the tax savings and penalty. But would he not have been better simply taking the hit for the distribution and ignoring the fact that he put it back? I am pretty sure he can do that.[QUOTE]

This is a traditional IRA. Why ignore the fact that he did "recontribute" to his IRA. To ignore this would have cost him another $700 -$800