Retirement tax questions

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@dmertz wrote:

The fact that only the $6,500 was distributed is problematic.  Presumably the account gained $618.73 (or $618.63, the comment mentioning the earnings mentions both possibilities, but the $0.10 difference is insignificant), or 9.5189%.  This means that, if treated as a return of contribution by submitting a substitute Form 1099-R (Form 4852), the $6,500 distributed represents a return of only $6,500 / 1.095189 = $5,935.05, accompanied by $564.95 of taxable gains.  That means that the account still contains $564.95 of excess contribution made for 2017, subject to 6% penalty for 2017, 6% penalty for 2018 and 6% penalty for each year going forward until corrected by a regular distribution of $564.95 (which would be a nontaxable distribution of excess contribution basis after the due date of the tax return).

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@dmertz - Are you suggesting a substitute 1099-R (4852) with $6,500 in box 1, $565 (rounded) in box 2a and code P in box 7 which would be entered on an amended 2017 tax return (as a 2018 1099-R) so that those earnings are taxable in 2017?

Then enter the remaining $565 (rounded) in the 2017 amended return as an excess on form 5329 and pay the 6% penalty?

Then for 2018 add the $565 again on a 5329 for another 6% penalty?

Finally before December 31 2019, remove the remaining $564.95 as a normal distribution so that another 2019 6% penalty will not apply for 2019.   In 2020 when the 2019 tax is done then enter that 1099-R distribution as non-taxable.?

That still leaves a problem that the IRS will receive a 2018 1099-R for a normal distribution form the IRA trustee that is being reported on a amended 2017 return with a code P instead.   That is sure to generate an IRS letter in about a year that will have to be explained.   (I guess a second substitute 1099-R with box 1 a zero and all else the same as the one received with an explanation of the situation might head off the IRS letters.)

Is my understanding of your suggestion correct?