recharacterization Chaos-Help
Recieved a call from American Funds stateing they could not process my clients recharacterization (my client only qualified for a partial contribution but fully funded their Roth). American funds stated they just recieved it. we mailed priority on the 12th. What can I do since according to them they recieved it to late? I do not want the client to pay a penalty is there any other way to handle this at this point and if so what is it.
Thanks
Permalink Submitted by Alan Spross on Mon, 2008-10-20 19:17
Unfortuneately, there is no way to get the recharacterization done now assuming this was a 2007 contribution. The result is that they have a valid partial Roth contribution. The excess amount will be subject to the 6% excise tax effective 12/31 plus interest on that tax.
The next target date is year end 2008. If the excess contribution can either be applied to the 2008 year OR is distributed prior to year end, another 6% tax will be avoided. This would be an early distribution and would NOT involve the need to withdraw any earnings, so the IRA custodian would just be asked to process a distribution, not a corrective distribution. The distribution would be reported on Form 8606 for 2008 and would be tax free as long as there was a balance of regular contributions still in the Roth. A Form 5329 would be needed also just to show that the former excess amount was either applied or withdrawn. There would be no penalty due for 2008, as long as this is done by year end.
I figured there would be a few instances of this, due to increased recharacterization demands due to market chaos early this month, just before the deadline. In many of these cases, doing the earnings calculation would be difficult unless the custodian has a good software program to calculate the earnings. But the earnings become moot once the 10/15 deadline passes.