Withdrawals of contributions by due date.

Forum|Forum|2 years ago
March 11, 2024
2 replies
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During the 2023 tax year I contributed $3500 both to my Self Employment Individual Roth 401k and my wife's Individual IRA. For the last 8 weeks business has plummeted from last year's 5 clients/day to 2 clients/week and my wife and I have agreed to withdrawal this current 2023 tax year's contributions of $3500 mine + $3500 hers which should avoid the 10% penalty. This will give us a cushion of a few months while I figure out what I can do in order to provide.

I read IRS Pub 590b where on page 31 it states, "Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions."

I'm ready but I have not filed my 2023 1040 yet and this wording suggests that if I do withdrawal this then I need to add the earnings to my income for 2023 before filing.

Is there a 10% penalty on withdrawn contributions during by the due date?

Do earnings have to be pulled out? I hear they may be subject to a 10% penalty.

How is this process even initiated with Vanguard? They only point me to an excess withdraw form but none of the four options appear to fit:

Nondeductible contribution: Employer contributions to a qualified plan in excess of the applicable deduction limit for the plan year.

Excess deferral: Employee deferral in excess of the limit under the Internal Revenue Code (IRC) Section 402(g).

Excess annual additions: Total additions to a participant’s account, which exceed the lesser of 100% of the participant’s compensation or the dollar limits under 415©. These may include both salary deferral contributions and employer contributions.

Mistake of fact: A mistaken contribution (generally due to a mathematical error). The types of errors that may be considered a mistake of fact are very limited (see IRS Revenue Ruling 91-4).

None of these sound like this situation as neither account was contributed to over the $6500 limit. Thank you.

TurboTax Home & Biz Windows

Best answer by dmertz

The Vanguard form that you describe appears to be for removing excess contributions made to the 401(k), not for a return of contribution from an IRA. You probably need a different form for the IRA.

If your Roth 401(k) employee contributions are not excess contributions, you are not permitted to take them out until age 59½ or becoming disabled, except as a hardship distribution. A hardship distribution from the Roth 401(k) will be a proportionate mix of your contributions (nontaxable) and gains (taxable and subject to a 10% early-distribution penalty). This would not be a return of contribution, so there is no attributable net income calculation the way there would be with a return of contribution from the IRA.

With regard to a return of contribution from the IRA, the SECURE 2.0 Act eliminated the 10% early-distribution penalty on the taxable attributable net income.

Form 8606 is not involved with either of these types of distributions.

fanfare

Employee

You take it back by requesting a -- return of excess contribution:

before tax filing date including extension: positive earnings allocable to the excess are included in income on 1040 Line 4b for the year of the contribution. negative earnings are ignored; in any case, for purposes of basis, consider the original requested amount as returned.
For a Roth IRA, the taxable amount is found on Form 8606 Line 25c.

You must have a) filed by tax day, or b) requested an extension of time to file by tax day to take advantage of the Oct 15 deadline.

positive earnings removed are no longer penalized 10% if you are under age 59 1/2. (eliminated in 2023)

@mgc6288

fanfare

Employee

"Self Employment Individual Roth 401k"

There may be some nuances for this type of account.

I'm not familiar with it.

@mgc6288

@dmertz

dmertzAnswer

Employee

The Vanguard form that you describe appears to be for removing excess contributions made to the 401(k), not for a return of contribution from an IRA. You probably need a different form for the IRA.

With regard to a return of contribution from the IRA, the SECURE 2.0 Act eliminated the 10% early-distribution penalty on the taxable attributable net income.

Form 8606 is not involved with either of these types of distributions.

mgc6288Author

Hmm...confusion. So even though I am attempting to backtrack this year's $3500 Roth 401k contribution, once it is in there, then there isn't any way of pulling it out without a 10% penalty? Not even the same year?

The Vanguard IRA process is convoluted at best, but you're saying do not use form 8606?