Life and Death Planning for Retirement Benefits

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100 Life and Death Planning for Retirement Benefits
are met, the corrective distribution is not taxable under and therefore is not
taxable under
Rather, apparently, the distribution is taxable only under which is the general
definition of gross income. Accordingly, it appears that the returned contribution itself is not
taxable (because it is not “income”); only any net income “attributable” to the contribution that is
distributed with it would be taxable. provides that “for purposes of section 61, any net
income [that is attributable to the contribution and accordingly is included in the distribution] shall
be deemed to have been earned and receivable in the taxable year in which such contribution is
made.” Reg. A-7 A-1(d).
The net income so returned is also subject to the 10 percent penalty under if the
participant is under age 59½ at the time he withdraws the contribution, unless an exception applies;
see B).
Wayne Example: Wayne, age 50, was eligible to, and did, contribute $3,000 to a new IRA (one
that contained no other funds) in 2009. Wayne made no other contributions to, and took no
distributions from, the IRA. By 2010, the investments in the IRA had earned $75 of interest. Wayne
then cashes out the account in March 2010, prior to the due date of his 2009 tax return, receiving
a distribution of $3,075. The $75 of earnings are included in his gross income for the year of the
contribution (2009), not the year they are distributed (2010), and the 10 percent penalty ($7.50) is
payable for the year 2009 unless an exception applies.
E. Effect on six percent penalty. A six percent penalty applies to excess IRA and Roth IRA
contributions. Reg. A-7. A corrective distribution that meets
the requirements of (see A–D above) is treated “as an amount not contributed”
for purposes of this penalty. Thus, making a corrective distribution that meets the
requirements o gets the participant not only a special income tax dispensation,
but also excuses him from the six percent penalty. (second to last sentence),
(last sentence).
F. Late-returned excess contribution that did not exceed Applicable Dollar Limit. See
regarding the maximum dollar amount that an eligible individual may contribute to
an IRA in any particular year. If an individual makes contributions to his IRA for a
particular year that are within the Applicable Dollar Limit for that year, but the individual
is not eligible to contribute to the IRA in such year (because he did not have sufficient
compensation income, or because he was too old; see , and this excess contribution
(together with earnings thereon) is not returned to him in time to be a corrective distribution
(see “A”), he will owe the penalty for the year the excess contribution occurred, but (as
long as he did not take a deduction for the contribution) it can be returned to him tax-free
even after the normal corrective-distribution deadline see Instructions for IRS
Form 8606 (2009), pp. 4–5 (“Return of Excess Traditional IRA Contribution”).
G. If correcting distribution is late: Income tax effect. If an excess IRA contribution is not
returned by the deadline (see “A”), the income tax treatment and the penalty treatment both
change. Except as described in “F,” there is no special income tax “deal” for an excess IRA
contribution that has not been withdrawn by the applicable deadline. Unless the excess
contribution can be “absorbed” into the following year’s IRA contribution (see “H”), the