same year IRA reversal

[sheilabudi]

I filed my 2019 Tax Return in April 2020, took $7000 IRA allowed deduction since I am 63. In August, I found out I made $6500 excess 2019 contribution to traditional IRA in Feb 28 this year. My plan is to withdraw the $6,500 excess, there won't be earnings because I will forefeit the interest to withdraw it before maturity plus penalty from the bank.  I expect the bank will report 1099-R to the IRS for the same year reversal of my 2019 IRA contribution.  In sum, (1) is this the right way to correct my unintentional excess contribution?  (2) I assume I don't need to file an amended return by Oct 15 because there is no earnings involved?  Please advise, appreciated your insight.

[macuser_22]

Your question is confusing - you say "same year" and then  say it was a 2019 excess???

What makes you think there are no earning involved?

If this was a 2019 excess then the July 15 due date to remove the 2019 excess without penalty has passed, however if you filed a timely extension OR filed your 2019 tax return on time, then you have until Oct 15, 2020 to remove the excess AND and earnings.       The IRA custodian is required to compute the earnings attributed to the excess.   Not removing the earnings is not an option - it is required to avoid the 6% excess penalty.

You can simply remove the excess with a regular distribution before the end of 2020 to avoid a 2nd 2020 6% penalty, but if you do that then you must file an amended 2019 return with a 5329 form reporting the 2019 excess and pay a 6% penalty on the $6,500 excess ($390).      Once the 6% penalty is paid then the earnings are allowed to remain in the account.

It is one or the other - either get a "return of excess contribution" PLUS earnings by Oct 15 (if you qualify for the extended due date) OR pay the 2019 $390 penalty and keep the earnings in the IRA.

[sheilabudi]

Thank you for your advise.  To clarify, I opened a 13-monthe CD on Feb 28, 2020 for 2019 traditional IRA contribution. The bank says there will be penalty and interest being forfeited to withdraw it now before March 28, 2021.  Since I opened it in Feb 2020 and plan to withdraw it now in Aug 2020, so I said it is a same year reversal.  Anyway, I will withdraw and report any earnings if any by Oct 15.  I guess that is the best bet to avoid the 6 percent IRS penalty.

[macuser_22]

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@sheilabudi wrote:

Thank you for your advise.  To clarify, I opened a 13-monthe CD on Feb 28, 2020 for 2019 traditional IRA contribution. The bank says there will be penalty and interest being forfeited to withdraw it now before March 28, 2021.  Since I opened it in Feb 2020 and plan to withdraw it now in Aug 2020, so I said it is a same year reversal.  Anyway, I will withdraw and report any earnings if any by Oct 15.  I guess that is the best bet to avoid the 6 percent IRS penalty.

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If it was a *2019* contribution made *in* 2020 then it is a 2019 contribution, not a 2020 contribution.    There is no "March 2021 date" for a 2019 contribution, in fact there is no March 28 date at all.      I suspect that the bank as referring to the *banks*  own penalty for early CD withdrawals from a 13 month CD that has nothing to do with the tax laws for excess IRA contributions.  

See IRS Pub 590A:

https://www.irs.gov/publications/p590a#en_US_2019_publink1000230716

[Note that the IRS pub is a 2019 pub so it gives 2018 & 2019 dates and the "April 17th" date was July 15 for 2020 because if the COVID-19 extension - so adjust dates accordingly - the tax law is the same for 2021.  The "plus extensions" means a timely extension request or a timely filed 2019 tax return that creates an automatic extension to Oct 15, 2020. ]

 

[quote]

Excess Contributions Tax

If any part of these contributions is an excess contribution for 2018, it is subject to a 6% excise tax. You won’t have to pay the 6% tax if any 2018 excess contribution was withdrawn by April 17, 2019 (plus extensions), and if any 2019 excess contribution is withdrawn by April 15, 2020 (plus extensions). See Excess Contributions under What Acts Result in Penalties or Additional Taxes , later.

Excess Contributions Withdrawn by Due Date of Return

You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.