T-IRA Distribution | Ed Slott and Company, LLC

T-IRA Distribution

If a sole proprietor contributes an amount to his T-IRA or SEP IRA (within the applicable limits) and then, in the same tax year, decides he needs the $ for cash flow purposes and withdraws the same $ - how is that distribution reported on 1099-R and taxed?

I thought there was a rule along the lines of a T-IRA contribution could be withdrawn in the same tax year w/o tax consequence

All help is appreciated

  • It depends on how the distribution is requested. If just a dollar amount distribution is requested it will be reported like any normal taxable distribution subject to tax and possibly penalty. 1099R will be coded 1 or 7. The original contribution is still treated as being made and valid.
  • The other option is to request a return of the specific year's contribution and earnings thereon. The amount returned will be increased by allocated earnings or reduced by losses under the usual rules. The 1099R will be coded 8 or P and only earnings appearing in Box 2a will be taxable and subject to penalty. The contribution is then treated as returned, therefore if the deadline for a new contribution has not passed another contribution for the year can still be made. A return of contributions is treated the same as the return of an actual excess contribution. If the taxpayer wants the entire amount returned, they would usually benefit by requesting in this manner to prevent taxation of the distribution (except earnings). 

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