Contribution to IRA while Taking 72t distribution
L1: Contribution to IRA while Taking 72t distribution
I have two separate IRA accounts (different account numbers but both at the same financial institution).
From one account, at age 51, I began taking SEPP 72t distributions in 2007.
In 2011, Imade a small contribution of $47 (pre-tax contribution) to the other IRA account. I have never taken any kind of distributions or withdrawals from this account.
I am not employed in 2011 and have no earned income (only interest and dividend income).
1) Will this pre-tax contribution impact the account with the SEPP 72t distributions exception to the 10% penalty for early withdrawals?
2) Do I need to file a form 5329 with my 2011 tax return?
3) Is there a different form, or a line on form 1040 or 5329 where I would indicate that the $47 pre-tax contribution was made into a different, separate IRA from the one that I am receiving 72t SEPP distributions?
p.s. I am married and my spouse works. So perhaps this $47 pre-tax contribution can be treated as a spousal IRA contribution?
2011-11-07 14:48, By: daybreak2, IP: [126.96.36.199]
L2: Contribution to IRA while Taking 72t distribution
Until I got to your “PS” I thought you had an excess IRA contribution of $47 since you have no “earned income” for 2011. If this were the case then you would have to contact your IRA custodian and remove the $47 contributioin and any earnings associated
with this amount. But since your wife works and I assume she has “earned income,” then you are OK. In fact, since you are age 50 or older, and assuming your wife earns atleast $12,000, and assuming she too is age 50 or older, then you both can contribute
$6,000 each to separate IRA accounts.
Unless you included your separate IRA balance with your SEPP IRA account to calculate your annual distribution amount, and your post doesn’t indicate you did, then you are OK to operate the non-SEPP, separate IRA as a stand alone account and it will have
NO impact on your SEPP IRA. So this should answer Q1: No impact on your SEPP Plan IRA.
Q2. What is the distribution code on your IRS Form 1099-R,Code 1 or Code 2? If Code 2 (not likely in today’s environment) then you don’t need Form 5329. If Code 1 then you file Form 5329 to claim the exemption from the early distribution penalty. The
$47 contribution in your case has no impact on your need for Form 5329.
Q3. The $47 contribution is reported near the bottom of Page 1, Form 1040 to reduce your income. Hopefully you and your wife will be able to contribute the full $6,000 each to your own IRA’s, assuming your wife meets the age 50 or older category. If she
will not be age 50 by December 31, 2011, then her limit is $5,000.
Hope this helps.
PS: I’m assuming your wife will be able to maximize her IRA contribution, taking in account her income and whether she participates in a company sponsored retirement paln.
2011-11-07 15:14, By: Jim F, IP: [188.8.131.52]
L3: Contribution to IRA while Taking 72t distribution
If you do not want, or need, the $ 47 deduction on your 2011 tax return, then you can report the $ 47 on form 8606 as a “Non-Deductible IRA contribution”. In that case, there would be no entry at the bottom of page 1 of your 1040.
However, whenever you start to take distributions from your IRA, you would have to file form 8606 in order to reduce your taxable income on a prorated basis, which is not difficult if you use a computer to prepare your taxes, but is complicated if you are
one of the few people who prepare the taxes manually. But if that is the only non-deductible contribution you ever make, I would forget about even filing form 8606 now, or even in the future when you take withdrawals.
For the future, I would not suggest making insignificant IRA contributions.
2011-11-07 16:40, By: dlzallestaxes, IP: [184.108.40.206]
L4: Contribution to IRA while Taking 72t distribution
While what you write is correct, speaking as one who has done exactly what you describe with the Form 8606 for a $30 contribution to my wife’s TIRA, I do not recommend this action!
Whether needed or not, take the $47 deductible contribution! It’s only one entry on one line and it’s a “done deal.” If using a tax program, it will take care of putting the numbers where they belong.
2011-11-07 16:55, By: Jim F, IP: [220.127.116.11]
L5: Contribution to IRA while Taking 72t distribution
I agree with you completely.
The poster did not indicate if this contribution was inadvertent. I was concerned that he was starting this as a regular contribution pattern, and was merely asking if it was OK to make IRA contributions while taking SEPP distributions, even if it is to
a different account.
On the other hand, if they are in a 25% or higher tax bracket now, then it probably makes sense to take the deduction, and possibly higher deductions. However, they probably started the SEPP because they needed more cash flow, and an IRA contribution ( higher
than $ 47) as others mentioned does not make sense. If they are in the 15% tax bracket, deductible IRA contributions do not usually make sense, because ultimately they, or the surviving spouse, will be in a 25% tax bracket, unless they withdraw all of their
IRAs before one of them dies, because the surviving spouse will probably be in the 25% tax bracket, as would any beneficiaries after both of them die.
2011-11-07 17:12, By: dlzallestaxes, IP: [18.104.22.168]
L6: Contribution to IRA while Taking 72t distribution
For more clarification to the scenario which prompted my questions:
1) It was an “inadvertent” contribution to an already existing IRA that was established several years ago. “Inadvertent” because within the IRA, I purchased a bond and my financial advisor did not figure out the accrued interest that had to be paid with
the bond purchase and thus I was $47 short in liquid cash funds at the time in the account for the purchase. It was too late to cancel the purchase – so I had to put in $47 and had it designated as “pre-tax contribution” for exactly the reason of not having
to deal with a Form 8606 required for “after-tax” for such a small amount.
2) I do not intend to make regular future contributions into this IRA as our tax bracket does not really need the deduction given our other deductions.
3) My spouse works and contributes to a 403(b) plan thru the employer — but does not nearly max out the allowed pre-tax amount to contribute on an annual basis. Spouse age = 61, my age = 55. Spouse’s employer provides a match on contributions into the
403(b) as well as providing a pension plan funded solely with contributions from the employer.
4) In addition to the income from my spouse’s employer, my spouse also has an income stream as a self-employed individual operating a part-time business in the evenings.
4) The “early distribution” reason code that I receive on the 1099 for the account that I take the 72T SEPP distributions from typically has in Box 7 a “2”
So, at this point, I am trying to figure out the best course of action given that we do not really need the $47 tax deduction — we’re just trying to figure out how to resolve this mess without jeopardizing the exemption from the 10% early withdrawal penalty
on the IRA from which the 72T SEPP is being taken. And, not having to keep up with the “after-tax contribution” requirements that follow when a Form 8606 is completed.
Two courses of action I see are as follows and I am looking to figure out which one is the easiest with less risk of jeopardizing the status of the 72T SEPP IRA:
1) request a refund of the $47 from the IRA custodian and have it designated as an “excess contribution” — if this course is taken — what additional forms, etc. would need to be filed with the tax return?
2) treat it as a “spousal IRA pre-tax contribution” into my separate IRA (the one that I am not taking the 72T SEPP distribution from).
2011-11-07 18:08, By: daybrake2, IP: [22.214.171.124]
L7: Contribution to IRA while Taking 72t distribution
# 2 is definitely the easiest, and has no disadvantages.
Thanks for the complete explanation of the background.
2011-11-07 18:22, By: dlzallestaxes, IP: [126.96.36.199]
L8: Contribution to IRA while Taking 72t distribution
I agree, you should use Option 2.
The IRS is going to receive a Form 5498 showing your contribution whether you removed it or not. But it will show a different IRA account number on it than the 1099R that reports your SEPP distributions.
In the unlikely event that they inquire, just point out that the contribution was to a different account outside your plan, as the 5498 indicates.
2011-11-07 19:48, By: Alan S., IP: [188.8.131.52]
L9: Contribution to IRA while Taking 72t distribution
Need I say more? Take “Door # 2” and your problems are solved in the easiest manner.
2011-11-07 21:08, By: Jim F, IP: [184.108.40.206]
L10: Contribution to IRA while Taking 72t distribution
Thanks everyone. Option 2 it is! Now, I just need to figure out how/where to put/designate a “spousal IRA contribution” on Form 1040?
2011-11-08 16:10, By: daybrake2, IP: [220.127.116.11]
L11: Contribution to IRA while Taking 72t distribution
The same place that all taxpayer IRA contributions go in the bottom section on page 1 of form 1040 called “Adjustments” ( or Allowances).
2011-11-08 19:08, By: dlzallestaxes, IP: [18.104.22.168]
L12: Contribution to IRA while Taking 72t distribution
Dlz is correct. Just show it like you would for your owndeductible TIRA contribution. There is no added reporting for a spousal contribution. The IRS will see when you file your return (must be joint return) that there is earned
income reported and the W-2 will have her SSN.
2011-11-08 20:16, By: Alan S., IP: [22.214.171.124]