Discussion:Excess ROTH IRA contribution
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Excess ROTH IRA contribution
| 20 May 2007 | |
| My client had earnings and used married filing separate status for years 2002-2005. He made ROTH IRA contibution for those years in which they were all considered as excess contribution as zero contribution as allowed due to the MFS status being used (please advise if this is incorrect). As I learnt that these excess contribution cannot be applied to later year at this time, as such, what would be the least painful way to get these fixed? Filing amended return and Form 5329 to report the 6% additional tax? How about filing 1040X to change the filing status from MFS to MFJ so as to make the contribution made become allowable since the limit of contibution under MFJ is much more than that under MFS?
In general, how do the taxpayers track their ROTH IRA contributions about whether their annual contributions exceed the statutory limit or not? | |
| 22 May 2007 | |
| If the client doesn't have a problem with paying the 6% excise tax every year, consider recommending that he leave the funds in the account. If he has a problem with the 6% excise tax, just have him withdraw the original contributions. The original contributions can be withdrawn without tax consequence. | |
Michaelstar (talk|edits) said: | 22 May 2007 |
| Riley2 - as I understand this - any earnings will need to be recognized as taxable income once withdrawn on the excess contributions. | |
| 23 May 2007 | |
| Any distributions made after the due date of the tax return are taxed under the normal rules for Roth distributions. There is no real reason to withdraw the earnings on the excess distributions since the 6% tax will cease at the point in time that the original contributions are refunded to the taxpayer. | |
| 9 June 2007 | |
| What if I re-characterize it from ROTH to traditional IRA? What are the pros and cons for doing so (compared with withdrawal of excess contribution)? Would the earnings be needed to be included as income and also subject to 10% addiitional tax? | |
| 10 June 2007 | |
| In order to do a recharacterization after the deadline for doing so has passed, you will normally need to file a private letter ruling request. Don't think that you would want to go to that expense in this case. | |
| 1 October 2008 | |
| I have the situation above and wanted to ask a few additional questions....
Have clients who MFS since year 2000 and they began making ROTH IRA contributions. Their prior CPAs never informed them that they were not allowed to make Roth IRA contributions. So, fast forward to 2007 tax return and I've informed them that they cannot make Roth IRA contributions and that the 6% excise tax applies every year they keep the money in the Roth. I thought they could just recharacterize all the contributions to a Regular IRA, but it looks like that is not the case because you only have until the extended due date of the tax return to do the recharacterization. So, for 2000 - 2006 contributoins they have not choice but to withdraw the money....Can someone confirm this? Question 2: Is there a statute of limitations on the excise tax? Or is there anyway to request abatement from penalty since my clients relied on CPAS to inform them on the rules and they didn't know they were doing something they weren't allowed to do? As I read the rules, I must file all prior years Forms 5329s as stand alone(2000 - 2007) and send in the penalties with the Forms. Question 3: I thought my clients are required to withdraw their contributions plus earnings, but someone above mentions they can leave the earnings in. Does anyone have case law or somewhere to send me that specifically says they can leave their earnings in? And, once they do get the distributions (plus earnings, I believe), the earnings are taxable in only the year taken out, right, plus subject to the 10% penalty on early withdraw. What a nightmare this has turned into. Any help would be greatly appreciated! | |
