Correcting Excess Contributions to a Traditional IRA

[Guest i_dont_know]

If an excess contribution was made to an IRA several years ago (e.g. 2007), and the excess contribution was quite large relative to the maximum allowable contribution (e.g. $50,000), and such excess contribution was not discovered until now, what would be the cheapest way to withdraw the excess contribution in the current year?

Also, if no deduction was ever taken on any portion of the excess contribution, could the excess contribution be treated as a nondeductible IRA contribution, and be withdrawn without including the amount in gross income, or subjecting the amount to the 10% early withdrawal penalty? Further, could the excess contribution be removed without removing any of the earnings on the excess contribution?

I know this is an unusual question, but I hope somebody may have some experience/knowledge regarding this type of situation.

[ETA Consulting LLC]

You may have to contact the IRS for that one. You're looking at a rolling 6% penalty each year on excess amounts not distributed by the tax filing deadline each year.

Good Luck!

[Guest i_dont_know]

Thank you for your post.

I've resigned myself to the fact that I'm stuck with filing Form 5329 for all prior years until now (starting from the date of the excess contribution) and paying the 6% excise tax each year. I guess I'm more concerned about how I can treat the distribution. If no deduction was ever taken from any of the contributions, do I still have to include in gross income the distribution from the IRA? Do I still have to pay the 10% penalty?

[jevd]

You're looking at taxable income in the year distributed, a 10 % penalty in the year distributed if under 59 1/2 and the 6% excess for each year it was left in the account. Because the excess was over the contribution limit the withdrawal is taxable. There is an exception if the error was due to incorrect information received from an employer in a Rollover transaction.

You may be able to reduce some of the penalty by forwarding some of the contributions into each year as non-deductible. I suggest you consult with a CPA that understands the implications of the transactions as it may require amended returns .

Edited for duplicate language

[ETA Consulting LLC]

I agree with everything that jevd said. Interesting thought about procedure, now that you posed the question. The IRS really forces the taxpayer to provide their non-deductible amounts by tracking them on the Form 8606. When a taxpayer hasn't maintained proper records, the IRS will take a automatic position that everything is taxable since no after-tax basis was tracked.

This further reinforces what jevd is saying. A CPA will understand this and engage in the necessary back an forth with the IRS to protect that basis.

Interesting how things may appear simple at first and always end up more complicated than they originally seemed. I guess this is what attracts us to the industry

Good Luck!

[Guest i_dont_know]

Thank you ERISAToolKit.com and jevd.