Amended 1040 - Excess contibutions?

[Guest JohnW]

My wife and I are self-employed and have Simple IRAs. Our 04 return was professionally prepared. The preparer followed my instructions to max-out contributions to our Simples. Due in part to an illness I was recovering from I didn't review the return as carefully as I should have. After filing by 4/15 I realized that because of a lot of itemized deductions the large part of the Simple contribution deductions were wasted. That is, we could have made considerably smaller contributions and still had no tax liability. The problem is we've made contributions that we didn't get a deduction for but that eventually will be taxed as they are distributed.

Can we now file an amended return showing smaller Simple contributions, and withdraw the excess contribution without penalty?

John W

[Gary Lesser]

The unwanted SIMPLE-IRA contributions are not "excess" contributions that may be removed without penalty; neither can they be recharacterized.

Arguably, if you file Schedule Cs AND are under extension, you could adopt a SEP for 2004 and make a small contribution that would invalidate the SIMPLE IRA plan; thus converting the "unwanted" contributions to "excess and nondeductible contributions." Amounts attributable to the "excess" should also be removed from the SIMPLE IRA. Earnings withdrawn will generally have to be included on the amended 1040s.

You will likely have to explain away the imposition of the withdrawal penalty tax (if applicable and reported (coded) by trustee).

[Guest JohnW]

Thanks Gary. Not what I wanted to hear, but what I expected. We're not under extension, so looks like this one gets chalked up to experience.