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Possi

IRA not allowed

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Last year, my client put $6500 in a Traditional IRA with no earned income. I did his tax return and told him to take it out before I file the tax return. 

I hope I told him the right thing. Now, I have a 1099R for $6500 coded 1. 

I have looked for an exception to the penalty but I can't find one. 

This should not be a $650 mistake on his part. Is there any grace that I can't find? 

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Wondering why you instructed him to withdraw it?  I recognize he had no earned income and I can only assume he deposited the funds for the tax benefit...not to simply "save for retirement?"

I'm not aware of any exception that you can bank on for this one.  Based on the way the 1099R is coded, the penalty may stand.  Maybe someone with more experience with IRA's will chime in. 

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the $6,500 is a return of excess contribution.  It is not taxed because it was not deducted from income.

the earnings should have also been returned.  the earnings would be taxable and subject to the 10% penalty

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2 minutes ago, Hahn1040 said:

the $6,500 is a return of excess contribution.  It is not taxed because it was not deducted from income.

the earnings should have also been returned.  the earnings would be taxable and subject to the 10% penalty

There was nothing earned. It was only there for a minute. And yes, it was never deducted. Was it "coded" incorrectly? Or is there an exception code I'm missing for the 5329? Or, maybe I should be using the 8606 to take it out of being taxed all together? 

Thinking out loud. Of course I use the 8606. None of it is taxable. Geez 

Thanks so much for the light switch flip. 

9 minutes ago, Yardley CPA said:

Wondering why you instructed him to withdraw it?  I recognize he had no earned income and I can only assume he deposited the funds for the tax benefit...not to simply "save for retirement?"

I'm not aware of any exception that you can bank on for this one.  Based on the way the 1099R is coded, the penalty may stand.  Maybe someone with more experience with IRA's will chime in. 

I advised him to withdraw it because there is a penalty for funding a traditional IRA if you don't have earned income. He was getting hit for it. Am I wrong? 

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28 minutes ago, Possi said:

Now, I have a 1099R for $6500 coded 1. 

With code 1 it seems your client may have simply asked for a distribution.  He should have asked for a return of excess contribution and any earnings, and that transaction should be reported with code 8 if handled properly.  Distributions coded "8" will not flow to the Form 5329, but may still be taxable if the withdrawal wasn't taken before 4/15. 

If the IRA was not deducted AND it and the earnings were withdrawn before 4/15, then the distribution isn't taxable in the year withdrawn.

I'd get all the documentation from the client that you can NOW because I'd expect a notice from AUR to be generated.

 

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2 minutes ago, jklcpa said:

With code 1 it seems your client may have simply asked for a distribution.  He should have asked for a return of excess contribution and any earnings, and that transaction should be reported with code 8 if handled properly.  Distributions coded "8" will not flow to the Form 5329, but may still be taxable if the withdrawal wasn't taken before 4/15. 

If the IRA was not deducted AND it and the earnings were withdrawn before 4/15, then the distribution isn't taxable in the year withdrawn.

I'd get all the documentation from the client that you can NOW because I'd expect a notice from AUR to be generated.

 

He did this himself. Opened the IRA just before we did his taxes. Took it out right away, long before the 4/15 deadline. It was a "stand alone" account, so I wouldn't think he needed that verbiage. Opened, closed, never on the tax return. I will gather all the documentation NOW! Thanks! 

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