Open and fully withdraw IRA within 35 days, all before Tax Reporting Deadline - how to avoid Early Withdraw Penalty?

[MarceloThor]

I opened an IRA account on May 20th, 2020. A month later (June 22nd 2020) I had to withdraw the whole balance. Note that was all before the IRS filing deadline of July 15th.

Got a 1099R stating the full balance as an early Distribution. Box 4 (Federal Tax Withheld) shows 10% tax withheld as expected. 

Question is: because I opened/deposited into this IRA account and withdraw within 2 months and all before the filing deadline for 2020, will I still have to pay a "Early Withdraw Penalty"? Is there a way to avoid paying the Early Withdraw Penalty in this specific case? 

[macuser_22]

---

@MarceloThor wrote:

I opened an IRA account on May 20th, 2020. A month later (June 22nd 2020) I had to withdraw the whole balance. Note that was all before the IRS filing deadline of July 15th.

Got a 1099R stating the full balance as an early Distribution. Box 4 (Federal Tax Withheld) shows 10% tax withheld as expected. 

Question is: because I opened/deposited into this IRA account and withdraw within 2 months and all before the filing deadline for 2020, will I still have to pay a "Early Withdraw Penalty"? Is there a way to avoid paying the Early Withdraw Penalty in this specific case? 

---

You had until the filing date to ask the IRA custodian for a "return of contribution plus earnings".  They would issue a 1099-R with a box 7 code 8 for a Traditional IRA or 8J for a Roth.

If a code 1 or J then it was removed as a normal taxable distribution and not a "return of contribution".

[DawnC]

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.    Another exception, only effective in 2020, allows the 10% penalty to be waived if the distribution was covid-related.   

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

• You, your spouse, or your dependent are diagnosed with COVID-19
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had work hours reduced to COVID-19
• You’re unable to work due to child care closure or hour reduction

You will be asked about possible exceptions to the early withdrawal penalty after you enter your 1099-R.   

[fanfare]

you  did not follow the procedure.

Enter the 1099-R with  different code so that line 4b is zero.

you will have to attach an explanation to your tax return explaining what you did,

and hope the IRS will accept that.

If you withdrew exactly what you put in, you should be ok.

If you withdrew more than you put in, that extra is taxable and goes on line 4b.

[MarceloThor]

I made a $6000 contribution to this brand new IRA in May 2020 (to be applied for 2019) and withdrew $6400 ($6000 + $400 earnings)  in June 2020, before the July Filing deadline. Form 1099-R states Gross Distribution $6400 and Tax Withheld $640. Unfortunately the 1099-R issuer put the wrong code (code 1)  and refuses to issue a corrected 1099-R.

How do I fix this in TurboTax to avoid the 10% Additional Tax Penalty? 

[macuser_22]

---

@MarceloThor wrote:

I made a $6000 contribution to this brand new IRA in May 2020 (to be applied for 2019) and withdrew $6400 ($6000 + $400 earnings)  in June 2020, before the July Filing deadline. Form 1099-R states Gross Distribution $6400 and Tax Withheld $640. Unfortunately the 1099-R issuer put the wrong code (code 1)  and refuses to issue a corrected 1099-R.

How do I fix this in TurboTax to avoid the 10% Additional Tax Penalty? 

---

If for 2019 then what did you claim on your 2019 tax return?  (If anything)

At the end of 2020 did you have any Traditional IRA at all?

Did you specifically ask the IRA trustee for a return of contribution plus earnings or did you just withdraw it yourself ?

And did you receive a 5498 form showing the contribution for 2019?

[MarceloThor]

I used the option to make the Traditional IRA deposit in June 2020 but to count towards 2019 (like if you deposit now but to count towards 2020 Tax Report. At the end, it didn't make any difference - I could not decrease my Income as it was just about above the maximum allowed to take advantage of the IRA reduction.

No balance in my IRA for 2020 ($0). I opened the IRA in May 2020 (deposit to count toward 2019 Tax filing) and withdrew the whole balance in June 2020, before the filing deadline. 

I withdrew using their website. AT the time it gave me just 2 options: early withdrawal, excess withdraw. As that was not an excess withdrawal, I had to pick the other option. I talked with them over the phone later and it seemed all good. Now, they refuse to reissue a corrected 1099-R.

Yes, I did receive a 5498 confirming my contribution for 2019.

Thanks in advance for your help!!