Roth IRA excess contribution withdrawn

[neilbrink]

My client made a Roth IRA contribution at the beginning of 2007. In calcualting his tax return for 2007, it was discovered that he made an excess contribution amount of $1450 which he withdrew before the April 15th deadline in 2008. For 2008, he recieved a 1099-R for the amount withdrawn with codes J P. The box 1 Gross Distribution shows $1392, box 2 is blank. ATX is including this as taxable income with the 10% penalty. Could the $1392 amount be the gain that was made on the contribution, which would be nearly a 100% return for less than one year? The $1450 that was withdrawn should not be taxable since it was the excess withdrawn before the filing deadline. Am I missing something here? Thanks. Neil

[RitaB]

My client made a Roth IRA contribution at the beginning of 2007. In calcualting his tax return for 2007, it was discovered that he made an excess contribution amount of $1450 which he withdrew before the April 15th deadline in 2008. For 2008, he recieved a 1099-R for the amount withdrawn with codes J P. The box 1 Gross Distribution shows $1392, box 2 is blank. ATX is including this as taxable income with the 10% penalty. Could the $1392 amount be the gain that was made on the contribution, which would be nearly a 100% return for less than one year? The $1450 that was withdrawn should not be taxable since it was the excess withdrawn before the filing deadline. Am I missing something here? Thanks. Neil

It sounds like when he withdrew the $1450, it had declined in value to $1392. If that is correct (ask the client if he got a total of $1392), try putting a "zero" in the 1099 entry for Box 2. It might help to read Instructions to 5329 and 8606, although neither of these forms needs to be used because the excess contribution is treated as if it never occured if withdrawn before the due date of the return. If this is a return of excess contributions and no earnings, you're correct - none is taxable. It seems that you may need to attach a statement; I can't remember, but check instructions to 5329 and 8606.

[neilbrink]

It sounds like when he withdrew the $1450, it had declined in value to $1392. If that is correct (ask the client if he got a total of $1392), try putting a "zero" in the 1099 entry for Box 2. It might help to read Instructions to 5329 and 8606, although neither of these forms needs to be used because the excess contribution is treated as if it never occured if withdrawn before the due date of the return. If this is a return of excess contributions and no earnings, you're correct - none is taxable. It seems that you may need to attach a statement; I can't remember, but check instructions to 5329 and 8606.

I was able to use the Form 8606 Worksheet, part 3, to match the distribution amount with the basis and it zero'd out. Thanks.

[RitaB]

I was able to use the Form 8606 Worksheet, part 3, to match the distribution amount with the basis and it zero'd out. Thanks.

Oh, good. You may already know this, if so, sorry - if this liquidated all his ROTH (in all accounts everywhere, and I don't think it did when I read OP), you can take the loss on Sch A. That may not even apply, but thought I'd mention it.