Excess contribution must be removed by tax filing deadline +extension to avoid 6-percent penalty. How does this affect reallocation/redesignation to contribution for future year?

[Appleby]

Any feedback on the topic will be much appreciated.

CarryBack Contribution Defined- Contribution made from January 1 through to April 15 of the current year for the previous tax year.

I think there is disagreement on the issue because of the language is 408(d)(4).

Rule for making the contribution

An IRA contribution can be made from January 1 to December 31 of the year to which the contribution applies. The contribution may also be made From January 1 to April 15 of the following year, providing the IRA owner properly indicates that the amount applies to the previous year when the deposit instrument (check etc.) is delivered to the IRA custodian. Cite:

IRC 219(f)(3) TIME WHEN CONTRIBUTIONS DEEMED MADE? For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

Rule for removing an excess contribution

The deadline for removing an excess IRA contribution is the tax filing deadline, plus extensions. 408(d)(4)(A) states (4)

CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN? Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if?

(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual's return for such taxable year,

One POV- The language in 408(d)(4)(A), specifically "paid during a taxable year" and "for such taxable year" means that the deadline for removing the contribution is the tax filing deadline for the taxable year in which the contribution was deposited to the IRA.

However, since 408(d) addresses “tax treatment of distributions” it appears that all it is saying is that the earnings on the earnings on the excess will be taxable for the taxable year in which the amount was deposited to the IRA.

For the 1099-R, Code 8 is used if the amount is removed in the year it is deposited to the IRA

Code P is used if the amount is removed the following year (by the tax filing deadline including extensions)

Reallocation of Excess amount.

Since a carry back contribution is deemed made in the previous year, the deadline for removing a carryback contribution that results in an excess is the same as the deadline for removing a contribution made in the previous year for the previous year (from January 1 to December 31 for the year in which the amount is deposited.

One POV- if the contribution is made from January 1 to April 15 of the current year for the previous year, reallocating the amount to the current year does not result in the 6 percent penalty being owed

Other POV- if the excess is not removed from the IRA, the 6 percent will apply. This is so even if the carryback contribution is reallocated to a current year contribution...unless, the IRA custodian can be convinced that indicating that the amount as a previous year contribution was an error and the transaction should be adjusted to a current year contribution.

Your thoughts?