Problem getting IRA custodian's help on calculating excess contribution earnings

[tdo061803]

Dear experts,

I understand when a Roth IRA has excess contribution the contribution and its earnings have to be removed. I was advised to not do it myself and ask the IRA custodian to do it. I reached out to the IRA custodian, my ex financial advisor, and asked her to do the calculation. It didn't really work out and I am looking for an alternative. Could someone make a suggestion?

Thanks,
Vicky

[macuser_22]

You don't go to your financial advisor, you go to the account trustee at the financial institution that holds the IRA.  Only the account trustee can preform a "return of contributions" and send you a proper 1099-R with the correct box 7 code of a return  of contribution (code 8 or P) with the returned amount in box 1 and the earnings reported in box 2a.

You cannot preform a "return of contributions" yourself.   Removing the excess yourself would probably be a taxable distribution and not a return  of excess contributions.

The return of contribution  (and earnings) must be completed by the due date of the tax return for the year that the contribution was for or the extended due date if a timely extension is filed.

[tdo061803]

Hi Macuser_22 

Thank you so much for your answer. Who would be the account trustee? I have the Roth IRA account at Ameriprise. 

"You cannot preform a "return of contributions" yourself." by that you probably mean I shouldn't just transfer money out in order to remove the excess right? I am going to file an Excess Removal Form. 

[macuser_22]

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@tdo061803 wrote:

Hi Macuser_22 

Thank you so much for your answer. Who would be the account trustee? I have the Roth IRA account at Ameriprise. 

"You cannot preform a "return of contributions" yourself." by that you probably mean I shouldn't just transfer money out in order to remove the excess right? I am going to file an Excess Removal Form. 

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The trustee would be Ameriprise.

No. don't do it yourself or that will be a normal taxable distribution.  I assume that this is either a 2019 or 2020 contribution that is still in the IRA and has not been removed yet.

You need to have the trustee do a "return of excess contribution" so that they will generate a 2020 1099-R with a code P in box 7 (if it was a 2019 contribution) or a code 8 (if it was a 2020 contribution).  The trustee must calculate  the earnings to return and enter those amounts on the 1099-R that you will not receive until Jan 2021.

[If a 2019 contribution returned in 2020 then you will need to either amend 2019 when you receive the 2020 1099-R next year OR when the excess plus earnings is returned to you you can enter it  in you 2019 tax return as if you had already received the 2020 1099-R - there is a special way to di that, but you must know the total amount returned and the earnings.  That would avoid having to amend 2019 when the 2020 1099-R is received in 2021.]

[tdo061803]

I called Ameriprise and was told they wouldn't be able to remove excess for me because there is no money in the account(I moved the money to another institute Institute B and closed the account). Sorry I left that piece of information out and it turns out to be important.

Should I ask Institute B to perform "return of contributions"? Will they be able to calculate the old earnings from Ameriprise?

[macuser_22]

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@tdo061803 wrote:

Should I ask Institute B to perform "return of contributions"? Will they be able to calculate the old earnings from Ameriprise?

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No.   Trustee B cannot return a contribution that was never made with them and would have no way to calculate the earnings.

@dmertz - any ideas how to handle this?

You are stuck with taking a normal distribution from B

[dmertz]

The return of contribution can be made from account B, but Institution B will have to rely on the earnings calculation being done by the participant.  Since the entire account A was moved to account B, the earnings calculation would be done as if the money had remained in A and had seen the same overall investment performance over the computation period.  (If the account B was an existing account that already contained other funds, I would do the calculation according to the prescribed method as if account B had been moved to account A instead of the other way around.)

The calculation requirements:

https://www.law.cornell.edu/cfr/text/26/1.408-11

[tdo061803]

Thank you @dmertz  and @macuser_22 for your help. Also spoke with my ex-advisor which was helpful. I hope I got it right. I shall calculate the earnings of the excess amount when I was with Ameriprise and then call Institute B to do return of contributions and pass them the calculation of earnings.

[pp15]

hi, 

Can you please expand the below statement. I'm in the similar situation.. Contributed 6000 towards traditional IRA for the year 2020 thinking that I would get deduction. MAGI was high and did not get deduction.. Reached out to custodian they removed contribution plus earnings recently ( I already filed 2020 taxes).. Do I need to file amendment or wait for 1099-R  which is going to be in next January or so and include the earnings in 2021 taxes?

"if a 2019 contribution returned in 2020 then you will need to either amend 2019 when you receive the 2020 1099-R next year OR when the excess plus earnings is returned to you you can enter it  in you 2019 tax return as if you had already received the 2020 1099-R - there is a special way to di that, but you must know the total amount returned and the earnings.  That would avoid having to amend 2019 when the 2020 1099-R is received in 2021."

[macuser_22]

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@pp15 wrote:

hi, 

Can you please expand the below statement. I'm in the similar situation.. Contributed 6000 towards traditional IRA for the year 2020 thinking that I would get deduction. MAGI was high and did not get deduction.. Reached out to custodian they removed contribution plus earnings recently ( I already filed 2020 taxes).. Do I need to file amendment or wait for 1099-R  which is going to be in next January or so and include the earnings in 2021 taxes?

The ONLY reason to report it before receiving the 1099-R is to *avoid* having to amend.  Since you already filed then wait for the real 1099-R before amending.

[pp15]

I really appreciate your inputs.. Once I receive 1099-R then file amendment for 2020 taxes?

since earnings withdrawn in 2021, I thought I need to include  these earnings in 2021 taxes (1040 form) and was under impression that no need to file amendment for 2020 taxes.

[macuser_22]

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@pp15 wrote:

I really appreciate your inputs.. Once I receive 1099-R then file amendment for 2020 taxes?

since earnings withdrawn in 2021, I thought I need to include  these earnings in 2021 taxes (1040 form) and was under impression that no need to file amendment for 2020 taxes.

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If this was a 2020 excess then the earning can only be reported in the tax year the contribution was for, not the year withdrawn.

[pp15]

Thank you Champ.. Appreciate it!

Is there any specific order?  Once I receive 1099-R..  file 2020 amendment and wait for it to be processed by IRS and then file 2021 taxes?

or can I file 2020 amendment and 2021 taxes together?

[macuser_22]

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@pp15 wrote:

Thank you Champ.. Appreciate it!

Is there any specific order?  Once I receive 1099-R..  file 2020 amendment and wait for it to be processed by IRS and then file 2021 taxes?

or can I file 2020 amendment and 2021 taxes together?

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The 2020 amended return will only be able to be mail filed and has nothing to do your 2021 tax return.  Each year must be filed separately even if mailed.

[pp15]

Thanks again and it looks like I need to write something on amendment 2020  "Filed pursuant to section 301.9100-2"

This is what I found after searching it.. Just wanted to check is this correct?