My federal tax withholding question on IRA distribution - what went wrong?

Thanks for the explanation! I have a similar situation but I'm confused - if it was processed as a regular distribution instead of a return of excess, doesn't that mean it would be taxable income? Would OP also have to pay the 10% early withdrawal penalty if they're under 59.5?

For the first question about taxable income, you're right to be concerned, but there's a solution. When filing taxes, even though it was processed as a regular distribution, you can still report it correctly as a return of excess contribution on your tax forms. This ensures it won't be counted as taxable income despite how it was initially processed. Regarding the early withdrawal penalty, you're also correct that normally there would be a 10% penalty for those under 59.5. However, returns of excess contributions are specifically exempt from this penalty when handled properly on your tax return, even if the financial institution didn't code it correctly at the time of distribution. When you or the original poster file taxes, you'll need to make sure this is properly documented to avoid both taxation and penalties.

Wait, does this actually work with complicated retirement account situations? I have a mess with multiple rollover timing issues and my tax software keeps giving me contradictory advice.

I'm a bit skeptical. I tried using my regular tax software for a similar issue and it was a disaster. How does this handle IRA recharacterizations versus returns of excess? Those are treated totally differently for tax purposes.

Yes, it definitely works with complicated retirement account situations. I had a combination of a partial rollover, a return of excess, and a regular distribution all in the same year. The system correctly identified how each transaction needed to be handled differently and provided specific guidance for each one, including the proper coding for Form 8606. For IRA recharacterizations versus returns of excess, it handles these quite differently as it should. It distinguishes between them clearly - identifying recharacterizations (moving contributions between different types of IRAs) as non-taxable events that require specific reporting, while returns of excess are handled with their own specific tax treatment. It guided me through the proper paperwork for each scenario and even highlighted the different deadline requirements.

How does that even work? I've tried calling the IRS for months about my distribution issues and literally never get through. They just disconnect after being on hold for hours.

Yeah right. No way this actually gets you through to the IRS. I've tried everything including calling right when they open and still can't get through. Sounds like a scam to me.

The service basically handles the waiting on hold part for you. They have a system that navigates the IRS phone tree and waits in the queue, then calls you when they've actually reached an agent. So instead of you personally sitting on hold for 3+ hours (which I tried multiple times), their system does it for you. It's definitely not a scam. I was super skeptical too, which is why I finally tried it after wasting so much time trying to get through myself. The difference is you're not sitting there with your phone tied up all day. You just get a call when there's actually an agent ready to talk. The IRS agent I spoke with walked me through the exact procedure for coding a return of excess contribution and even sent me follow-up documentation.

Does the timing issue apply differently for Roth vs Traditional IRAs? I have a similar situation with both types of accounts and I'm confused about which deadlines apply to each.

The timing rules are actually the same for both Roth and Traditional IRAs. For both types, you need to withdraw excess contributions (and any earnings on those contributions) by your tax filing deadline including extensions (typically October 15th) to avoid the 6% excise tax penalty. The main difference is in how the earnings are treated. For Traditional IRAs, the earnings are generally taxable in the year you make the withdrawal. For Roth IRAs, the earnings are also taxable if you withdraw them, but they may additionally be subject to the 10% early withdrawal penalty if you're under 59½ and don't qualify for an exception.

Yes, you'll likely need Form 5329. I had a similar situation and had to use it to report the excess contribution and show that I had taken corrective action by removing it, even though it was incorrectly coded as a normal distribution. This helps avoid the 6% excise tax on excess contributions.