Roth IRA/SEP-IRA Mix-up
An individual, age 64, made a $2,000 contribution to his existing Roth IRA the beginning of April this year for 2008. He thought he was making a contribution to his existing SEP-IRA, and reported it as such. The mix-up was discovered just 2 days ago. Is there any way he can rectify his error and get his contribution into his SEP-IRA for 2008 even though he is way past the deadlines? Or is he stuck with his error and should file an amended tax-return?
Permalink Submitted by Alan Spross on Thu, 2009-10-29 23:23
Was this contribution supposed to be a SEP contribution or just a regular TIRA contribution to the SEP IRA account? Where was this reported on his tax return?
Permalink Submitted by Anonymous (not verified) on Fri, 2009-10-30 01:04
Along with alan’s questions, is it clearly his error and not the company’s? Sometimes the smallest thing will be accepted as doubtful by the custodian. They may correct it if he makes a convincing case.
[u]If not, I only see these steps:[/u]
Amend 2008 tax return by undoing the SEP contribution – tax deduction (individual or employer) or 8606 non-deductible. Leave in as Roth, if he qualifies. If he does not qualify or does not want it, remove as excess after the deadline with all the tax consquences.
pmk
Permalink Submitted by Sidney Poretsky on Fri, 2009-10-30 17:06
That”s interesting, he actually reported it as an IRA deduction on line 32 of his (federal) tax return, and not as a Self-employed SEP deduction on line 28.
The check he sent to the company was clearly marked with the Roth IRA account number, name of the Roth IRA fund, along with a deposit slip of that fund clearly indicating it as an ’08 contribution. So clearly it is not in any way the company’s error.
Permalink Submitted by Alan Spross on Fri, 2009-10-30 17:37
It was therefore reported as a traditional IRA contribution to a SEP IRA. This is permissible, but of course does not match the actual contribution to a Roth.
Options:
1) If their income is not too high for a Roth contribution, consider leaving the contribution alone and amending the return to eliminate the deduction on line 32.
2) The recharacterization deadline has now passed, so the contribution cannot be recharacterized and is a permanent Roth contribution. He can take a distribution if he wants the money back, but it would not be a corrective distribution, just an early non qualified distribution. However, if would come from his balance of regular contributions and would therefore be tax free. There is no way to preserve the deduction he has already taken, so a 1040X will be needed and an amended state return also, if applicable.
3) If income is too high for a Roth contribution, he has incurred the 6% excess contribution penalty because the contribution was not corrected by the extended due date. He would file a 5329 with the 1040X and pay 6% of $2,000. He must either:
a) Distribute the $2,000 prior to year end to avoid another 6% penalty
b) Leave the funds in the Roth IF he qualifies for a Roth contribution for 2009 that he has not made. He would report this on the 2009 5329, applying the contribution to 2009 instead of removing it. He still owes the 6% for 2008.
Permalink Submitted by Sidney Poretsky on Fri, 2009-10-30 20:18
Many thanks for your help on this