With the high PLR fees now, there is no sense in pursuing a PLR unless the reward is well worth the time and expense. In your case, there is a routine solution to your problem.

A failed conversion is treated the same as an excess regular Roth contribution. However, the correction depends on what contributions or distributions you have taken from your Roth since the 2004 conversion. Please advise what these have been and then I can clarify what other steps you may need to take to put this behind you.

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The solution is rather complex. I also need to know if you qualified for a regular Roth IRA contribution in any year starting with 2004, that you DID NOT MAKE to either a Roth or traditional IRA.

In other words, your income might be over 100,000 and you could not convert, but it has been about 50% higher for regular Roth contributions. This comes into play because if you did not make a Roth contribution that you were eligible to make, the failed conversion can be applied as if it was a regular contribution. So, starting with 2004 which years were you eligible and which you did NOT contribute?

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Yes, that would be a possibility, and the 5498 reporting the contribution to the Roth for 2004 should be checked to see if that happened, but you would also have to eligible for a regular contribution.

What I was primarily getting at was the filing of Form 5329, Part IV, where current line 19 actually applies any remaining excess as a regular Roth contribution for that year, and would result in the elimination of the 6% excise tax by reducing the excess balance to -0-.

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With no distributions or contributions since 2004, you still need to determine IF you were eligible for a Roth contribution in 2004 or any year since. You need to know this to complete Form 5329 for each year.

If you were never eligible in those years for a regular contribution, the correction process follows:
1) Complete 5329 on a stand alone basis for 2004 through 2006. You owe a 6% excise tax for each year (6 X $240 = 720).
2) Request the IRA custodian distribute $4,000 to you near the end of this year. Earnings stay in the Roth. Report the 4,000 distribution on Form 8606 (Part III) with your 2007 return. The distribution should not be taxable since you already paid the tax when you converted.
3) Finally, the 5329 for 2007 with your return, but two parts are needed.
Part I line 3 will be $4,000 and you will owe the 10% early withdrawal penalty. For Part IV, you report your distribution showing that you have eliminated the excess contribution, and therefore do not owe the 6% tax any longer.

Total cost is $1120 plus whatever interest the IRS chooses to bill you.

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You can take the distribution now if you want to get this out of the way. But the reason I recommended that you wait is that any earnings on your 4,000 will accumulate tax free in your Roth. That’s 4 more months of tax free earnings rather than taxable earnings. You do not incur another 6% excise tax until 12/31, so that’s the vital date before which the distribution needs to come out.

Another very arcane fact that could affect you – if this 4,000 was your only Roth contribution ever, although your earnings will still be in the Roth IRA, your 5 year rule has technically not begun to run because your only contribution was not allowed. This just means that the first opportunity you can, you should make a regular Roth contribution, but if your income is too high, you can always wait to 2010 to make another conversion of any amount you wish. There is no income limit after 2009.

With respect to the interest, the IRS has not been consistent on this issue, sometimes they bill the interest and sometimes they don’t. Since the rate is subject to change quarterly over this period, the calculation could be complex and I do not know how to figure it exactly. So forget the interest, and just hope they don’t bill you. The good news is that once you pay the 6% taxes on these older items, the interest clock stops. Of course, the interest will only be on the $720 because the $400 will be a current obligation.

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1) That’s correct, because you had a conversion that you did not hold for 5 years.
2) No tax on the 4,000 income because you already paid tax when you did the conversion in 2004. However, you DO report the distribution on Form 8606, Part IV. If you have had regular contributions, it comes from them, if not it comes from your conversions starting with the oldest.

You did not mention the 6% excise tax for 2004, but you owe that since 2004 was the year of the actual failed conversion. In other words, the free standing 5329 forms are due from 2004, 05 and 06 @ $240 each. See my post of 8/15 19:31

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Form 5329 is used to deal with penalties, and the previous poster made a Roth conversion when his income was too high.

As long as your son was eligible to make all those contributions, there is no reason he would need to use Form 5329. If he takes distributions, those are reported on Form 8606 until after he reaches 59.5.

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