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Can a carryback contribution be adjusted to a current year contribution?

Last Updated August 11, 2011

Question: 

An individual made an IRA contribution in March of 2011 and indicated on the IRA contribution form that the amount should be deposited as a 2010 contribution. He now realizes that the contribution created an excess for 2010 as he had no taxable income (for 2010). However, he will receive sufficient taxable income to cover the contribution for 2011 . Since the contribution was deposited in 2011, can he instruct his IRA custodian to make an adjustment so that the amount is reflected on their books and records and reported on IRS Form 5498 as a 2011 IRA contribution?

Answer: 

No.  This type of contribution is referred to as a carryback contribution.  Once an individual designates an IRA contribution as a carryback contribution, the designation is irrevocable.  Cite: Prop. Treas. Reg. 1.219-1(d)(2).

He has the following options:
  • Request a return-of-excess contribution. This would be a distribution of the excess IRA contribution, accompanied by any net income attributable (NIA) to the excess amount. His custodian may require that he submit written instructions for the distribution request. He should check with them to determine their operational requirements. The return-of-excess must be done by tax filing deadline, plus applicable extensions. If he files his return or files for an extension by his tax filing due date, he receives an automatic 6-months extension; so, if the tax filing due date is April 15, the deadline would be October 15 with the 6-months extension.  The custodian should still report the contribution on IRS Form 5498 for 2010. They should also issue a 1099-R for 2011 with a Code P in box 7 for the excess distribution. The Code P is to show that the distribution was for a correction of the 2010 contribution, even though the Form is being issued for a 2011 distribution, and therefore any earnings on the amount would be taxable in 2010.  If he is under age 59 1/2 when the distribution occurs, the earnings will be subject to the early distribution penalty.
  • Leave it in the IRA and apply it to 2011. Under this method, the IRA custodian is still required to report the contribution on a 5498 for 2010, and he will owe the IRS a 6% penalty because the excess was not removed from the IRA by the deadline for removing a 2010 excess contribution. He will need to file IRS Form 5329 to report the penalty. If the contribution is deductible for 2011, the deduction can be taken on Form 1040. If it is not deductible he should file IRS Form 8606 so as to inform the IRS and keep track of the amount to prevent double taxation.
Important notes:
  • Not all custodians calculate the NIA. If his custodian will not calculate the NIA, he may refer to the instructions in TD 9056, available in the NIA definition
  • If the IRA is a Roth IRA, it is automatically applied to 2011 for his tax purposes (but not on the IRA Custodian's books and records)  unless it is removed by the aforementioned deadline. This continues for each year it remains in the Roth IRA if it creates another excess. For instance, it if creates an excess for 2010 and is not timely removed, it is considered to be a  2011 contribution for him and causes another 6% penalty to apply
  • If the IRA is a traditional IRA, it does not automatically get applied to the next year. It can only be applied to the next year if he indicates that he wants it to be applied to the next year on his tax return. If it is not applied to the next year and it is not removed by the deadline, he will owe the IRS a penalty of 6% for every year it remains in the IRA
  • The only way to avoid the 6% penalty is to remove the excess contribution by the deadline
  • Tax withholding applies to any earnings on the return of excess contribution. Therefore, the withholding election must be made so as to prevent the default withholding of 10%....unless he wants the withholding to apply