Deadline Approaches for 2022 IRA Recharacterizations and Excess Contribution Removals
By Tammy Schultz, QPA, CISP
The deadline for IRA owners to recharacterize or remove their 2022 excess contributions is fast approaching. Typically, the federal tax return extension deadline is October 15. But this year that date falls on a Sunday, so the deadline has been moved to October 16, 2023. If an IRA owner has an excess contribution and doesn’t recharacterize or remove it before this deadline, she’ll incur a 6 percent penalty tax on the excess contribution that should have been removed from the IRA, but wasn’t.
Although the same deadline applies to both recharacterizations and excess contribution removals, this article will focus on removing excess contributions.
An IRA owner removed his 2022 Traditional IRA contribution as an excess contribution before October 16, 2023. The IRA owner said that his tax preparer told him he was not eligible for a Traditional IRA contribution 2022. After further discussion with the IRA owner, he is eligible to make the contribution but he is not eligible to deduct it. Could the IRA owner remove the contribution, even if he was eligible to make it?
Yes, as long as the removal is done in a timely manner. A “deemed excess” occurs when an IRA owner chooses to remove any eligible current-year regular, spousal, or catch-up contribution by treating the contribution as an excess. IRA owners have until their tax return deadline, including extensions to remove a deemed excess contribution. If an IRA owner files his tax return timely, an automatic six-month extension applies for removal of that current year contribution as a deemed excess..
An individual made a $6,500 Traditional IRA contribution in January 2023 for tax year 2022. If she removes the contribution and the net income attributable (NIA) to the contribution before her 2022 tax return due date, for which year is the NIA taxable?
The NIA is taxable for the year in which the contribution was deposited (2023). When reporting a 2022 contribution that the IRA owner made and removed as an excess in 2023, payers should enter distribution code 8, Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2023, on a 2023 IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Even though the NIA of an IRA excess contribution removed by the IRA owner’s tax filing deadline (including extensions) is taxable to the IRA owner, it is no longer subject to the 10 percent early distribution penalty tax if the IRA owner is under age 59½.
We have an IRA owner that made multiple contributions to his IRA in 2022. Can he choose which contributions should be removed as an excess?
For a timely removal of excess, the last regular contribution is deemed to be the contribution that is distributed as a return of excess. If multiple regular contributions make up the excess amount, contributions are deemed to be removed in the order of last in, first out.
For example, William made monthly $600 contributions to his Traditional IRA. William contributed a total of $7,200 for 2022. He has exceeded the 2022 annual contribution limit ($6,000) by $1,200. The last two months of contributions are deemed to be the contributions that are distributed as a return of excess. The contributions that are considered excess have relevance, because the dates when they were made will have an impact on the NIA calculation, and thus the total amount that is to be removed from the IRA.
