At what point in time is an IRA contribution considered an "exces

[Guest amfam2]

Have a client who remitted $2,305 during 2001 as a contribution for tax year 2001. He contacted me in February, 2002 to indicate that he put in too much money. What he would like to do is redesignate (note: NOT recharacterize) $305 as a contribution for 2002 tax year. He has not yet filed his tax return for the 2001 tax year.

1. My analysis of the above situation is that an excess contribution has not occurred because he redesignated the $305 prior to the due date of the filing of his 2001 tax return.

2. No 6% penalty applies because the $305 has not met the technical definition of an "excess" contribution.

Do you agree or disagree?

In my research of the code, it indicates clearly that excess contributions are not subject to the 6% if the funds are physically withdrawn from the account prior to the due date of the return, plus extensions. Since I am redesignating the funds as a contribution for 2002 and not for 2001, these funds haven't met the definition of an "excess" contribution.

I am interested in your thoughts.....

[Guest mpedroza]

You're correct that the 6% wouldn't apply, as long as the excess is distributed as an excess (plus earnings attributable) prior to the tax filing deadline. If they do not take out the excess and want to realocate the excess to another tax year as a contribution, the 6% is owed for the year it was in the account as an excess (Form 5329).