Page 36

The tax can’t be more than 6% of the combined value of all your IRAs as of the end of your tax year. The additional tax is figured on Form 5329. For infor- mation on filing Form 5329, see Reporting Additional Taxes, later. Example. For 2018, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $6,000 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($6,000 minus the $5,500 limit). The contribution earned $5 interest in 2018 and $6 interest in 2018 before the due date of the return, includ- ing extensions. He doesn’t withdraw the $500 or the inter- est it earned by the due date of his return, including exten- sions. Paul figures his additional tax for 2018 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by 0.06, giving him an additional tax liability of $30. He enters the tax on Form 5329, line 17, and on Schedule 4 (Form 1040), line 59. See Paul's filled-in Form 5329, later. Excess Contributions Withdrawn by Due Date of Return You won’t have to pay the 6% tax if you withdraw an ex- cess contribution made during a tax year and you also withdraw any interest or other income earned on the ex- cess contribution. You must complete your withdrawal by the date your tax return for that year is due, including ex- tensions. How to treat withdrawn contributions. Don’t include in your gross income an excess contribution that you with- draw from your traditional IRA before your tax return is due if both of the following conditions are met. • No deduction was allowed for the excess contribution. • You withdraw the interest or other income earned on the excess contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount. In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to with- draw, you can use the same method that was used in Worksheet 1-3. If you timely filed your 2018 tax return without withdraw- ing a contribution that you made in 2018, you can still have the contribution returned to you within 6 months of the due date of your 2018 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you re- ported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed). How to treat withdrawn interest or other income. You must include in your gross income the interest or other in- come that was earned on the excess contribution. Report it on your return for the year in which the excess contribu- tion was made. Your withdrawal of interest or other in- come may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B. Form 1099-R. You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable. Example. Maria, age 35, made an excess contribution in 2018 of $1,000, which she withdrew by April 15, 2019, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2018 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she isn’t yet 591/2 years old), but she doesn’t have to report the excess contribu- tion as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2018. Excess Contributions Withdrawn After Due Date of Return In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income. • Total contributions (other than rollover contributions) for 2018 to your IRA weren’t more than $5,500 ($6,500 if you are age 50 or older). • You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year. Excess contribution deducted in an earlier year. If you deducted an excess contribution in an earlier year for which the total contributions weren’t more than the maxi- mum deductible amount for that year (see the following ta- ble), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040X for that year and don’t deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, which- ever is later. Chapter 1 Traditional IRAs Page 35