Return of Excess Deadline

Submitted by Kevin O'Hearn on Mon, 2022-06-27 15:51

Hello,

I wanted to get your thoughts on the scenario below:

IRA owner makes a prior year 2021 Roth IRA contribution in February of 2022. The IRA owner realizes they were not eligible for the contribution and needs to distribute it as a return of excess (ROE).

We know that you have until the tax filing deadline, plus extensions, to remove it without incurring the 6% excise penalty. The question is….what is the deadline to remove without incurring the 6% penalty?

I have always believed that you must remove by the tax filing deadline for the year the contribution was made for. So in this example, the contribution was for 2021 and must be removed by the 2021 deadline (even though it was physically made in 2022).

Our custodian believes that since the taxes on the earnings are recognized in the year the contribution is physically made that they would also have until the tax filing deadline, plus extensions, for the physical contribution year. So in this example, they would have until the 2022 tax filing deadline, plus extensions, to remove the 2021 contribution since the contribution was physically made in 2022.

What is your stance? Thanks!

Thank you.



Submitted by Alan - IRA critic on Mon, 2022-06-27 16:42

  • The deadline to remove a 2021 excess contribution is 10/17/2022 provided that the taxpayer either filed the 2021 return by the due date or filed a timely extension by that due date. The year the contribution is assigned to, not the year it was actually made determines the deadline. The tax year for which any gains are taxable (2022 in this case) is a different issue and does not affect the deadline to process the return. In this example, the custodian should not process a return of a 2021 contribution after 10/17/2022. 
  • The following is copied from Sec 219(f)(3), which states that a prior year contribution such as in this case is treated as made on the last day of 2021 if it is assigned to 2021. 2021 would therefore be treated as the tax year which determines the deadline to remove the contribution, even though any earnings returned are taxable in 2022. 
  • The wording in Sec 408(d)(4) is less than clear, but “taxable year” should be interpreted under the Sec 219 provision cited above.


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