Permalink Submitted by Alan Spross on Tue, 2010-03-02 00:15
Well, hopefully I will not come up with a 4th different answer!
Note that she is stuck with the 6% excise tax for 2008 on the $470 excess. This can be paid with a stand alone 5329 for 2008, and the IRS may bill interest on the late payment, or perhaps they will not since the amount is small.
As you implied, she could take a corrective distribution now for the 2009 excess amount (amount known after 2009 return calculation) plus $470. That will clear room for the 2008 excess to be applied to 2009 by following the Inst for Form 5329 line 19, and it will eliminate a second 6% excise tax for 2009. The IRA custodian can be provided with the combined dollar figure for a return of 2009 contributions and they will figure the earnings, if any. If there are earnings, the earnings will be taxable and subject to penalty on the 2009 return. But in the phaseout range, the added earnings will result in yet another small excess amount for 2009 like a dog chasing his tail. To avoid that, a little extra can be taken out over and above the prior total excess plus $470. Another solution is to simply pay the 6% excise tax on the small amount left over.
Sometimes, if the Roth holding the contributions has had impressive earnings (eg 30% plus) during the calculation period, the client can actually come out ahead by paying the 6% excise tax to avoid the distribution and penalty of earnings. This protects the earnings that can then stay in the Roth. In that case, a distribution of just the exact excess amount can be ordered as a regular distribution and not a corrective distribution. But the amounts in this case are probably too small to warrant the added complexity.
The first solution above can probably be handled within a week by the IRA custodian so that the 2009 return can be completed on time. The amount of earnings will have to be reported on line 15b and the 10% penalty on the earnings goes on line 58 of Form 1040. And a 2009 5329 will be needed to show that the excess balance has been applied. There will be no excise tax for 2009. The accountant actually doing the return will have to know how to enter this into the program. A 1099R will be produced in Jan, 2011 but can be ignored because this will not affect the 2010 return.
One way around this phaseout problem in 2010 and future years is to simply make a non deductible TIRA contribution and then convert it to a Roth IRA. There are no income phaseouts for non deductible TIRA contributions. But if client has other traditional IRAs, the conversion would be mostly taxable. You can also get around the phaseout problem by recharacterizing the Roth excess to a TIRA contribution, but then you will be working with an 8606 forever unless you convert the entire TIRA balance.
Permalink Submitted by Alan Spross on Tue, 2010-03-02 00:15
Well, hopefully I will not come up with a 4th different answer!
Note that she is stuck with the 6% excise tax for 2008 on the $470 excess. This can be paid with a stand alone 5329 for 2008, and the IRS may bill interest on the late payment, or perhaps they will not since the amount is small.
As you implied, she could take a corrective distribution now for the 2009 excess amount (amount known after 2009 return calculation) plus $470. That will clear room for the 2008 excess to be applied to 2009 by following the Inst for Form 5329 line 19, and it will eliminate a second 6% excise tax for 2009. The IRA custodian can be provided with the combined dollar figure for a return of 2009 contributions and they will figure the earnings, if any. If there are earnings, the earnings will be taxable and subject to penalty on the 2009 return. But in the phaseout range, the added earnings will result in yet another small excess amount for 2009 like a dog chasing his tail. To avoid that, a little extra can be taken out over and above the prior total excess plus $470. Another solution is to simply pay the 6% excise tax on the small amount left over.
Sometimes, if the Roth holding the contributions has had impressive earnings (eg 30% plus) during the calculation period, the client can actually come out ahead by paying the 6% excise tax to avoid the distribution and penalty of earnings. This protects the earnings that can then stay in the Roth. In that case, a distribution of just the exact excess amount can be ordered as a regular distribution and not a corrective distribution. But the amounts in this case are probably too small to warrant the added complexity.
The first solution above can probably be handled within a week by the IRA custodian so that the 2009 return can be completed on time. The amount of earnings will have to be reported on line 15b and the 10% penalty on the earnings goes on line 58 of Form 1040. And a 2009 5329 will be needed to show that the excess balance has been applied. There will be no excise tax for 2009. The accountant actually doing the return will have to know how to enter this into the program. A 1099R will be produced in Jan, 2011 but can be ignored because this will not affect the 2010 return.
One way around this phaseout problem in 2010 and future years is to simply make a non deductible TIRA contribution and then convert it to a Roth IRA. There are no income phaseouts for non deductible TIRA contributions. But if client has other traditional IRAs, the conversion would be mostly taxable. You can also get around the phaseout problem by recharacterizing the Roth excess to a TIRA contribution, but then you will be working with an 8606 forever unless you convert the entire TIRA balance.