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Mistaken IRA Contribution


Ananda
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If an individual mistakenly makes a contribution to an IRA and wants to cancel the contribution can this be done by withdrawing the contribution by the due date of the individual's tax return without including in income and without penalty? I know IRC Section 408(d)(4) addresses and provides favorable tax treatment to withdrawals of excess contributions to IRA's (in excess of 219 limits) prior to the tax return filing date, but I'm not aware of any tax rules that provide favorable tax treatment to individuals who want to nullify and withdraw a mistaken IRA contribution that is not an excess contribution.  Any opinions on this? 

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I agree with CuseFan. That said I'm not aware of any IRS position that lets someone unwind an IRA contribution because the decided they didn't want to make one after the fact.

EDIT From some links on the internet it appears you can unwind an IRA contribution provided you do it in the same taxable year.

Here is one link I found that talks about it but you can probably find others if you google "Can IRA Contributions be Reversed"

https://finance.zacks.com/can-ira-contributions-reversed-same-year-2098.html

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36 minutes ago, Ananda said:

Thank-you for the responses. Its interesting but I also found the Zack's article stating that IRA contributions can be reversed if done in the same taxable year, but I found no legal support in Code, regs, rulings etc., to support Zack's position.

Neither did I. When reading the article more closely it appears reversal is only in the case of excess contribution but it's not worded well. I think they reference "contributing too much either because you exceed the dollar limit of lose your job and don't have enough income". So I'm back to my initial position which is you can't do it unless someone finds some other evidence that I missed. Sorry about that.

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I have not researched this, but if it can be done the support would be under the general principle that most transactions, generally for any reason, including a change of mind, can be rescinded if done in same taxable year, but not after end of taxable year. See Rev. Rul. 80-58 involving, if I remember correctly, a real estate sale. Presumably the same principle was behind the permissibility of Roth deconversions, but of course TCJA 2017 changed the statute to prohibit those.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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