Owning an IRA is a step on the road to retirement peace of mind. If you make the maximum contribution each year over decades, you'll end up with a significant sum at retirement age. Sometimes, however, you might need to take back an IRA contribution. You might have inadvertently exceeded the yearly limit. You might have made a contribution early in the year and subsequently been laid off, discovering that your contribution exceeded your yearly income. IRA contributions have to be reversed within the same tax year.
Get your IRA ending balance of the month just before the contribution you want to reverse. You can find this information in your account statements, in print or online. We'll call this figure the starting balance. We'll call the contribution you want to reverse the "original contribution." You'll need the starting balance figure to calculate how much interest accrued on the amount you want to withdraw. For example purposes, our starting balance is $200,000.Step 2
Get the most recent end-of-month balance. We'll call this the ending balance for the period during which the original contribution remained in the account. Our ending balance will be $205,000.Step 3
Add together the amount of the original contribution plus any other contribution amounts since that date. Deduct this sum from the ending balance. If you have taken any distributions from the IRA, add those amounts to the ending balance. Continuing with the example, the amount of the original contribution is $500. We contributed another $500 since that date, making our total contributions for the period $1,000. As it happens, we also made a withdrawal of $1,000. $205,000 -$1,000 + $1,000 = $205,000. Our net ending balance is still $205,000,Step 4
Subtract the starting balance from the net ending balance. $205,000 minus $200,000 equals $5,000.Step 5
Divide the result by the starting balance. In our example, $5,000 divided by $200,000 equals .025. This represents the interest rate for purposes of this calculation.Step 6
Multiply the amount of the original contribution by the interest rate to arrive at the net income attributable. In the example, the original contribution equals $500. $500 times .025 equals $12.50. The net income attributable in this case is $12.50.Step 7
Add the NIA to the amount of the original contribution. In this case $500 plus $12.50 equals $512.50.Step 8
Withdraw the sum of the original contribution plus NIA by the tax-filing deadline for the year. Typically, this is on or about April 15. If you file an extension, you may withdraw the sum by the extension deadline, which is typically Oct. 15.Step 9
Look for Form 1099-R by mail at the start of tax season. Your IRA trustee sends you the form and reports your reversed contribution to the IRS.Step 10
Report the NIA as income on your return. The IRS considers the NIA as taxable income. If you are younger than 59 1/2, you will also have to pay a 10 percent penalty on the interest amount, even though you will have withdrawn it by the time you file your return.