Fixing Roth mistake
Hello. I have a client who overcontributed to his Roth in 2006 by$361.22. This was not realized until after the tax filing deadline was passed. Because he is passed his tax filing deadline, how should this mistake be fixed? does $ have to also come out because of the overcontribution?
Thank you
Permalink Submitted by Alan Spross on Wed, 2008-12-17 22:00
It must be corrected, but it is possible that it already HAS been corrected. What did client do with respect to TIRA or Roth contributions for 2007 and 2008? If he was eligible for a Roth contribution, but did not contribute the max, the $361.22 would be applied for that year.
Need to know that before determining what he needs to do now.
Permalink Submitted by [email protected] on Thu, 2008-12-18 00:43
Thanks for Replying, Alan. The client did not make a Roth contribution in 2007 (JT Total income was $102,540 in 2007; the spouse did make a spousal trad IRA contribution in 2007 for $5000 making AGI $97,540 for 2007. 2008 income will be similar). He also has not made a Roth Contribution yet for 2008, nor has his spouse yet (will await answer on this subject). How would it automatically be fixed? I really appreciate your help.
Permalink Submitted by Alan Spross on Thu, 2008-12-18 04:01
The excess contribution for 2006 incurs a 6% excise tax on a 2006 Form 5329 because it was not corrected by 10/15/07. However, since he was eligible to make a Roth contribution in 2007 and did not make it, his $361 is automatically applied to 2007 by completing the 2007 Form 5329, Part IV. This eliminates the excise tax from being charged again for 2007. This also can be totally taken care of without contacting the IRA custodian because it is done by filing these forms, and nothing needs to be withdrawn from the Roth.
The 2006 5329 can be filed on a stand alone basis. He will owe $22 with that form. The IRS may send a bill for interest, but will probably not bother because of the small amount. The 2007 5329 can also be sent along with the 2006 form on a stand alone basis. It would be best to get this done before the 2008 filing season.
The 2008 return is totally unaffected by the above activity.