Removing and Recharacterizing Excess IRA Contributions
By Tammy Schultz, CISP, CHSP, QPA
Our IRA owner contributed to his Traditional IRA in 2023 and later determined that the contribution was ineligible. He has already filed his 2023 federal income tax return. Can the IRA owner correct an excess after April 15 and still avoid the six percent excess contribution penalty tax?
Yes. The deadline to remove excess contributions and avoid the penalty—removed with the net income attributable (NIA)—is the IRA owner’s tax return due date, plus extensions. According to the Form 5329 instructions, Additional Taxes on Qualified plans (including IRAs) and Other Tax-Favored Accounts, IRA owners who file their taxes timely will receive an automatic six-month extension for correcting the excess contribution. So if your client filed timely (generally by April 15, or by an approved extension date), he’ll have until October 15 to withdraw the excess contribution and avoid the six percent excess contribution penalty tax.
An IRA owner died last year. His son, who is the executor of his estate, came in today and asked to recharacterize his 2023 Roth IRA contribution because he was not eligible to make that contribution. May he do this?
Yes. According to Treasury Regulation 1.408A-5, Q&A 6, an executor, administrator, or other person responsible for filing the decedent’s final federal income tax return may elect to recharacterize a contribution on the deceased IRA owner’s behalf. The financial organization should remove or recharacterize an ineligible contribution made by a decedent at the request of the executor of the decedent’s estate. The financial organization should report the transaction in the estate’s name and tax ID number. Assuming the IRA owner’s tax return is filed timely, the executor will have until October 15, 2024, to recharacterize the contribution.
An individual made a $7,000 Traditional IRA contribution in January 2024 for tax year 2023. If she removed the contribution and NIA before her 2023 tax return due date, for which year is the NIA taxable?
The NIA is taxable for the year in which the contribution was deposited (2024). When reporting a 2023 contribution that the IRA owner made and removed in 2024, payers should enter distribution code 8, excess contributions plus earnings, on a 2024 IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Even though the NIA is taxable to the IRA owner, it is—thanks to the SECURE 2.0 Act—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 her IRA in 2023. Can she choose which contribution to remove as an excess?
When multiple contributions have been made, the last regular contribution is deemed to be the contribution that must be distributed as a return of excess. In cases where there are multiple excess contributions, the contributions are deemed to be removed in the order of last in, first out.
For example, William, age 25, made $650 monthly contributions to his Traditional IRA. William contributed a total of $7,800 for 2023. He has exceeded the 2023 annual contribution limit ($6,500) by $1,300. The last two monthly contributions are deemed to be the contributions that must be distributed as a return of excess.
