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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121107  
Subject: Re: ira overfunding Date: 12/7/1998 7:18 PM
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[[f $2600 has been put in the ira for 1998

1. what tax penalty]]

6% on that excess contribution each and every year that the contribution is "excessive". So, in your example, you would owe a penalty in the amount of $36 on the excess contribution in 1998...and every year thereafter.

[[ 2. if the extra $600 left in & in 1999 only
$1400 put in is everything now ok from
a funding standpoint]]

Potentially, yes...under certain circumstances...and not without some pain (in the form of a current year penalty).

You can't reduce an excess contribution by applying it against an EARLIER year for which less than the maximum amount allowable was contributed.

But an excess contribution can be applied to a later year by a contribution of less than the "maximum deductible amount" for the later year. The "maximum deductible amount" for the later year attributable to the preceding year's excess contribution is the amount by which the amount allowable as a deduction in the later year exceeds the "amounts contributed" in that year, not including any of the earlier year's excess contribution.

Example: Tina was entitled to contribute to her IRA and deduct $1,000 in Year 1, and $1,500 in Year 2. In Year 1, Tina actually contributed $1,400, but she could deduct only $1,000. For Year 1, T had an excess contribution of $400, on which she paid an excise tax of 6% or $24 (6% of $400). To avoid the excise tax for Year 2, Tina can correct the $400 excess amount from Year 1 in Year 2 if her actual contributions are only $1,100; (the allowable deductible contribution of $1,500 minus the $400 excess contribution from Year 1 that Tina wants to treat as deductible in Year 2). Tina can deduct $1,500 in Year 2 (the $1,100 actually contributed plus the $400 excess contribution from Year 1).

An appropriate reduction is required in the amount allowable as a deduction in the later year for any amount allowed as a deduction for an earlier taxable year for which the deficiency assessment period has expired, if the amount allowed in the earlier year is more than the amount which should have been allowed.

Hope this helps...
TMF Taxes
Roy

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