Return of IRA contributions in same year vs removal of contribution basis

[skk4]

In 2018 and 2019, I made contributions to a Roth IRA. I now want to withdraw my contributions in full. Must I report this as a "return of IRA contribution" as defined in instructions for form 8606 (see below; the instructions say that I must not report the distribution on 8606), or can I simply ignore this section and report my entire distribution in form 8606 and claim exemption from tax due to the contribution basis?

"Return of IRA Contributions
If, in 2019, you made traditional IRA
contributions or Roth IRA contributions
for 2019 and you had those
contributions returned to you with any
related earnings (or minus any loss) by
the due date (including extensions) of
your 2019 tax return, the returned
contributions are treated as if they were
never contributed. Don’t report the
contribution or distribution on Form
8606 or take a deduction for the
contribution. "

[Critter-3]

Yes ... you must report the 1099-R for the distribution and complete the 8606 even if it is not taxable ... because if you don't report it with the return you will 2 years later when the IRS sends you a CP2000 notice.

[dmertz]

Critter-3, I suggest that you remove the word 'Yes' from your answer.  The question that skk4 asked was how this is to be handled, which the rest of your reply does address, indicating that this would be a regular distribution of contribution basis that is required to be reported on Form 8606 and is not a return of contribution.

skk4, be aware that you are reading the instructions for 2019 Form 8606.  The deadline for obtaining a return of a 2019 contribution was October 15, 2020 and has already passed.  A return of contribution would have been required to be accompanied by any investment gains attributable to the contribution being returned, and those gains would be subject to income tax and early distribution penalty.

[macuser_22]

To add further:    You said " I now want to withdraw my contributions in full." so if the excess is still in the account then as @dmertz said, it is too late to get a return of contributions or to avoid the 2019 6% excess contribution penalty that must be reported and paid on a 2019 5329 form.

The excess must still be removed before Dec. 31, 2020 or ANOTHER 2020 6% (form 5329) penalty will apply.    To remove the excess, it can only be done now as a normal distribution (not a return of contribution) and because the 6% penalty applied, ONLY the excess need be removed - any earnings can remain in the account and need not be removed.

[skk4]

Hi all, thanks for your replies. A few clarificatoons: I am not trying to remove excess contributions, but just the basis itself. Also, I shouldn't have posted the instructions for 2019, since I will be reporting this for my 2020 return. I made a mistake above; I actually made contributions in 2019 and 2020 (not 2018).

Whatis the difference between a return of contributions and a regular distribution in the first place? It seems that in both cases, the basis amount is not penalized and the additional earnings are penalized (if it is an early withdrawal). I am worried that the IRS will complain that my distribution of contributions should have been reported as a return of contributions instead, since they were made in the same year 2020. Would it be better for me to just wait until 2021, when there would be no chance that it can be interpreted as a return of contributions?

[dmertz]

I didn't see any mention of an excess contribution.

[Critter-3]

You can take the contributions any time you want ... you will get a 1099-R reporting the distribution and you will enter it in the program and simply answer the follow up questions to indicate it was a return of contributions ... it is just that simple.  

[skk4]

@macuser_22 above was advising about excess contributions.

[macuser_22]

I assumed an excess.  If not excess then disregard the penalty.

A "Return of contribution" would be reported by the financial institution on a 1099-R with a box 7 code "P" or "8" depending on the year.   A regular distribution would have a code "J" if you are under age 59 1/2 or code "Q" or "T" if over age 59 1/12.      Removing only your own prior contributions and not the earning are not taxable.

[fanfare]

a return of contribution would make it like it never happened. you have to meet the deadline.

a taxable distribution is subject to penalty if done  before you reach age 59 1/2.