what to do with excessive contributions
L1: what to do with excessive contributionsMy wife (age 53) has made excessive contributions to her ROTH IRA in 05,06,07.This has resulted in 6% penalty on year by year basis. She can roll over 07 contributions to a traditional IRA, leaving only the 05 & 06 excessive contributions.Does a 72(t) distribution diminish the “excessive contributions” on a year by year basis? (It will take years..)Or, bite the bullet, withdraw the excess, pay the penalty and avoid the recurring 6%.HELP!!2008-03-25 16:03, By: zim, IP: [18.104.22.168]
L2: what to do with excessive contributionsWe need to drill down on this a little more. If your wife has a 72t plan in process for her traditional IRA, she could recharacterize the 2007 excess Roth contribution ONLY to a new traditional IRA account. She must be absolutely sure to avoid any confusion because if the contribution is recharacterized into any of her 72t accounts, she has a busted plan. If the contribution is deductible, it applies to the 2007 return and if not, Form 8606 should be filed to report her added basis in her traditional IRAs. That would incrementally reduce the taxable % of her 72t distributions, which would then also be reported on an 8606 even though they may not have been previously.
The 72t distributions will not correct the Roth excess contributions from 05 and 06 because they are to a different type of IRA. She must correct those excess contributions by taking regular Roth distributions from her Roth account and reporting them both on Form 8606 and 5329. This will end the 6% excise taxes with those paid on the 2007 tax return. The earnings from those 05 and 06 contributions can stay in the Roth.
But the main issue is to make sure not to bust the 72t plan in the process of recharacterizing 2007 contributions. If any ofmy assumptions areincorrect, please post.
2008-03-25 19:49, By: Alan S., IP: [22.214.171.124]
L2: what to do with excessive contributions Thanks Alan,To drill down…My wife has only one IRA, (The Roth IRA), she does not have an existing 72(t) in effect.She intends to reclassify the 07 excess to a traditional IRA before April 15.She thinks that maybe establishing a 72(t) distribution from the one IRA would allow her to “count down” the excessive contributions.Every thing that I”ve read indicates that the two are unrelated; i.g,; the excessive contribution amounts remain constant until removed, while the 72(t) yearly distribution are a component of a withdrawal plan, not a excessive contribution correction. In which case the excess penalty will remain in effect until she withdraws the excess and pays the early withdrawal penalty. I think that this would get rid of the 6% year by penalty she is now paying on the excess.I think that this reflects what you said in your post. “72(t) and excessive contributions don”t relate.”2008-03-26 04:01, By: zim, IP: [126.96.36.199]
L2: what to do with excessive contributionsYou are on the right track.
If there was an independent need for a 72t from the TIRA, the 72t distributions would actually eliminate the excess contribution and further 6% excise taxes.
However, her excess is in the Roth IRA, and TIRA distributions will not cure the Roth excess. Note that there is a separate section of Form 8606 to report excess TIRA contributions from those of excess Roth contributions. More to the point, there is NO early withdrawal penalty (10%) for correcting regular Roth excess contributions because there was no tax deduction taken for those contributions, and because NO earnings will come out. If earnings came out, then a 10% penalty would apply to the earnings.
But a positive side effect of paying the 6% penalty is that earnings no longer have to be distributed, JUST the contribution amount itself. And under Roth ordering rules the first dollars out come from regular contributions.
Therefore, all she has to do it remove the excess amount only of the contributions for 05 and 06, report it on FOrm 8606 as coming from contributions, and on 5329 to wipe out prior excess amounts that existed as of year end 2007. No additional taxes whatever will be owed for 2008.
Taking this one step further, if she did have an independent need for a SEPP and the SEPP used the same IRA that had the aged excess amounts in it, it would cure the excess contribution as a by product of the SEPP distributions. But when there is no need for the SEPP, it would be costly and unproductive to even consider starting one for some other reason, much less an incorrect reason.
2008-03-26 15:21, By: Alan S., IP: [188.8.131.52]