Form 5329 for withdrawal of excess contribution from traditional IRA

[sussings2]

Hello. I made the maximum contribution of $7,000 to an IRA for 2019, but discovered I hadn't enough earned income to take it. I filed an extension, waited until September when I would be 59 1/2, then withdrew the entire amount including the accrued interest. I've been told I need to file Form 5329 and fill out Part III, line 15, "reflecting that the withdrawn contribution is no longer treated as having been contributed." But the instructions don't explain how to do this. Do I put in zero, rather than $7,000? I can't use TurboTax because I have to attach a statement explaining the distribution.

[macuser_22]

You were told wrong.  You only file the 5329 if you DID NOT timely withdraw the excess plus earnings bu Oct 15, 2020 if you filed an extension.    There is no penalty timely removing the excess - just the tax on the earnings.

You should have asked the IRA trustee to make a return of contribution plus earnings so they will issue a 2020 1099-R with a box 7 code "P" that you will receive in January of 2021. 

The earnings will be taxable income in 2019 which will require an amended 2019 tax return to enter the 2020 1099-R with the code P.

Only if you have NOT filed your 2019 tax return yet can you enter a "dummy" 2020 1099-R with a code P if you know the exact amounts for box 1( amount returned) and box 2a (taxable earnings) that will be on the 1099-R when you receive it.   Doing that would prevent having to amend later.    If yiu already filed then there is not advantage to amend now before receiving the 1099-R.

[sussings2]

Thank you. So, the earnings are taxable in 2019, even though they all accrued in 2020? I made the contribution in February of this year for 2019.

I have not yet filed my taxes for 2019; I'm working on them now. I can't use TT because I have to send a statement explaining the distribution. I do know the exact amounts. Can I attach a "dummy" 2020 1099-R to my tax return? 

[macuser_22 · Accepted solution]

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@sussings2 wrote:

Thank you. So, the earnings are taxable in 2019, even though they all accrued in 2020? I made the contribution in February of this year for 2019.

I have not yet filed my taxes for 2019; I'm working on them now. I can't use TT because I have to send a statement explaining the distribution. I do know the exact amounts. Can I attach a "dummy" 2020 1099-R to my tax return? 

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Earnings on a returned contribution are taxable in the that year that the contributions was *for*, not the year made or returned.

You can use TurboTax to report this with the required explanation statement.

*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2019 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal IRA distribution - then:

You can just report it now and ignore the 2020 1099-R when it comes.

You would enter the 2020 1099-R with the total distribution in box 1 (contribution plus the earnings),

The earnings in box 2a,

Check the IRA/SEP/SIMPLE box.

Enter code "P" in box 7 - don t worry that it will say "taxable in 2018 "

Enter code "1" in box 7 if under age 59 1/2 (lower box 7).

On the "Which year" screen say that this is a 2020 1099-R.

After the 1099-R summary screen press continue.

If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.

Enter the explanation for the excess contribution and that you are reporting a 2020 1099-R on your 2019 tax return to avoid having to amend in 2020.

The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form.

[sussings2]

I think I understand now. If I'm filing a paper tax return for last year, I should show the distribution and accrued interest (which is taxable in 2019) on Form 1, and attach an explanation stating that the distribution is the return of an excess contribution for 2019. The 1099-R that I receive next January should have the code P in Box 7, which means that the contribution was made for 2019 but returned in 2020, prior to the tax deadline. As long as I've shown and explained the distribution and paid the tax on the interest, I shouldn't have to file an amended return next year. Is this correct?

[fanfare]

if you got back less than your contribution there are no earning to report. if you got back more than your original contribution then you know what the accrued earnings are.

if you got back exactly your original contribution.

then a) you were all in cash, or b) you didn't have the custodian do the calculation

[sussings2]

Thanks so much for your time and the excellent explanation!

 Just one more question: Do I need to explain why I made an excess contribution beyond saying my earned income was less than I expected?

[macuser_22]

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@sussings2 wrote:

Thanks so much for your time and the excellent explanation!

 Just one more question: Do I need to explain why I made an excess contribution beyond saying my earned income was less than I expected?

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No.  There is no difference between removing an excess and simply changing you mind and having a normal (allowable) contribution returned before the due date.    You can remove either one.  No need to explain why.

[sussings2]

Thank you so much!

[bajaquick]

Very good explanation on return of excess contributions and earnings.

My situation is in a Roth and I am 79 years old.

I withdrew $10K from my Roth as a loan, but missed the 60 day rule (Thought it was extended for CARES, but unfortunately that was only on RMDs for IRAs). So I withdrew the $10K + 1,200 in excess earnings, and my 1099-R shows the $1,200 as taxable. The code shoe 8J.

This was all in 2020, so when I enter it in TurboTax,  it shows the $1200 in earnings, but also levies the 10% as premature withdrawal. 

Should I do the same as your explanation and fill in "Other reason for withdrawal" and indicate that I  am 79 years of age. 

Thanks again.

[macuser_22]

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@bajaquick wrote:

Very good explanation on return of excess contributions and earnings.

My situation is in a Roth and I am 79 years old.

I withdrew $10K from my Roth as a loan, but missed the 60 day rule (Thought it was extended for CARES, but unfortunately that was only on RMDs for IRAs). So I withdrew the $10K + 1,200 in excess earnings, and my 1099-R shows the $1,200 as taxable. The code shoe 8J.

This was all in 2020, so when I enter it in TurboTax,  it shows the $1200 in earnings, but also levies the 10% as premature withdrawal. 

Should I do the same as your explanation and fill in "Other reason for withdrawal" and indicate that I  am 79 years of age. 

Thanks again.

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Yes - that is correct.    You must choose "Other reason" if over 59 1/2 to eliminate the penalty.