How do I avoid tax liability?

halandbonnie2016 — Sat, 01 Jun 2019 05:22:58 GMT

I am 71 self employed. My wife is 70 retired. In 2016 we made a $6500 sep ira contribution in my wife's name. Upon discovering there was no benefit we withdrew the same $6500 from that account 6 days later. I received a 1099-R Showing a $6500 distribution. How do I avoid having this money be taxable income?

What's the code in Box 7 of the 1099R?

ChristinaS — Sat, 01 Jun 2019 05:23:00 GMT

What's the code in Box 7 of the 1099R?

Box 7 shows the number 7 with ira/sep/simple next to it

halandbonnie2016 — Sat, 01 Jun 2019 05:23:02 GMT

Box 7 shows the number 7 with ira/sep/simple next to it

Unless your wife was self-employed in 2016, she is not el...

dmertz — Sat, 01 Jun 2019 05:23:05 GMT

Unless your wife was self-employed in 2016, she is not eligible to make a SEP contribution. Since her contribution to her IRA was for $6,500, the limit for a regular personal IRA (not SEP) contribution, it seems that she might have actually made a regular traditional IRA contribution, although she is ineligible to make a regular traditional IRA contribution if she reached age 70½ in 2016. You'll want to check with the IRA custodian since SEP contributions are reported differently to the IRS than are regular IRA contributions, and if you wife had no self-employment income, the IRS is likely to take issue with seeing a SEP contribution reported on the Form 5498 issued by the IRA custodian for this account. They'll also take issue if it was a regular traditional IRA contribution and she was not eligible to make the contribution due to being over age 70½.

Regarding the distribution, I'll assume that the $6,500 contribution was not an excess contribution for either of the reasons I mentioned above. Since a contribution was made and not distributed as a return of contribution, it must be reported as a contribution on your tax return.

The distribution she took is coded as a regular distribution, not a return of contribution. As a regular distribution, it is subject to ordinary income tax. If her traditional IRAs include basis in nondeductible contributions (possibly as the result of making this $6,500 contribution), the taxable and nontaxable amounts of the distribution will be calculated on Part I of Form 8606.

If your wife's contribution was actually an excess contribution, more details are needed to figure out what needs to be done. However, it won't change the fact that, as presently reported, she received a regular distribution.

For the distribution to be qualified as a return of contribution, any earnings or loss attributable to the contribution being returned are required to be distributed as well. If there were any earnings or loss during the 6 days the money was in the account, the amount distributed for a return of contribution would had to have been an amount other than $6,500. If there were no earnings during the 6 days, it might be possible to get the IRA custodian to treat this as a bookkeeping error and change to coding to indicate a return of contribution and allow the distribution to negate the contribution.

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How do I avoid tax liability?

What's the code in Box 7 of the 1099R?

Box 7 shows the number 7 with ira/sep/simple next to it

Unless your wife was self-employed in 2016, she is not el...