Roth IRA Excess Contribution 1099-R

[delaney]

Clients received 1099-R for excess contributions. Gross amount is $800 and taxable amount is $50. Distribution code J ( early distribution ) and P (excess contribution). Questions:

1)Is this subject to the 10% penalty?

2)If so, is the entire amount of $850 subject to it?

3)If not, what code to I use to exclude it?

Thanks for the help.

[winnie]

yes and no

The $800 is not taxed and not subj to penalty. The $50 is subject to penalty. Was this reported on last year's tax return? You need to know which year this was for.

I often have this happen when I determine the client is not eligible for a Roth for 2006. So for example, I found this 04/01/07. They take it out before 4/15/07. I attach a schedule to line 15 on the 06 return. Form 8606 directions has nice examples and directions for these situations. It is a royal pain because you end up dealing with it for 2 years.

Have fun.

[veritas]

Is it a 2007 1099R?

If so you need to amend 2006 and include it.

[FEDUKE404]

Taxable and amend

I have fought several Roth IRA wars, many a result of a "salesman" getting a person into hot water with a little too much money (don't they know the rules?) going into the accounts.

Generally speaking, if there was found to be an excess contribution, the taxable amount is shown and the tax/penalty comes from that amount. Things can get very messy if you need to go back and amend prior year tax returns for calculating the penalty for the year(s) involved. You actually have to break down the dollar amount for each year, and file a Form 5329 for that year, paying particular attention to the dollar value of the account on 12/31 of each year as it is part of the penalty calculation.

I think code "P" locks you into amending the prior year return.........even if the excess funds were not withdrawn until after 12/31/06, the funds are still deemed "2006 funds."

OTOH, if a person puts in money for 2007, and by the filing date of the 2007 taxes removes the funds, then (paraphrasing the IRS statement) "the contribution never existed" and the taxpayer is liable only for the calculated gain while the funds were in there (i.e. no Form 5329). The gain is calculated by dollar amount of funds in the account on date of withdrawal, and dollar amount on date(s) when the offending funds were placed into the account. If there is a gain, it is taxable. If there is a loss (stock market decline), nothing is taxable.

Be advised this entire area is a minefield, and even the stockbrokers et al frequently farm out the calculations to others higher up the food chain. And, yes, I'm seen some awful errors that necessitated a couple of corrected - corrected Forms 1099-R to get it right. As an example, in early 2007 a client placed the maximum amount of funds into his Roth IRA. By early Feb of 2007 it was obvious that due to (unexpected) income he would eventually have to remove the 2007 funds. Although he had placed $5k into the account (over 50) the first week in Jan, after all the dust had settled he received somewhere around $4.8k back, due to market decline, in early March of 2007. Non-taxable transaction all the way 'round!

There have been prior threads on this topic, and one point was whether or not the IRS would eventually"catch" someone for making an improper/excess IRA contribution. (It would seem quite simple?) No one ever came up with an answer on that one.

Good luck!!!!!

FE

[delaney]

Follow up

Thank you all for your responses. If the 1099-R is a 2007, isn't the IRS going to match that to my 2007 return? I understand the logic of amending the 2006 return, as the money was from that year's contribution but it seems like not reporting it on 2007 will cause a matching error?

[FEDUKE404]

Still think it's not '07 income

Thank you all for your responses. If the 1099-R is a 2007, isn't the IRS going to match that to my 2007 return? I understand the logic of amending the 2006 return, as the money was from that year's contribution but it seems like not reporting it on 2007 will cause a matching error?

I thought you stated Code "P" was already on the Form 1099-R ?

If so, you might want to consult page 12 of http://www.irs.gov/pub/irs-pdf/i1099r_07.pdf

As for the IRS, I have no idea how/if they match anything related to these types of distributions. Perhaps someone with greater insight/experience can enlighten us all!

FE