Recharacterization or Removal of excess Contribution
Recently discovered I overcontributed to a roth for 2008. Am I past the time when I am eligible to recharacterize the excess portion and drop it into my traditional IRA for 2008? The original contribution went in April of 2009 (for 2008 year). If I cannot, am I resigned to simply moving that excess back into a non-reitrement account and forfieting the full deduction for that year?
Permalink Submitted by Alan Spross on Thu, 2010-03-18 23:45
Yes, the extended due date for 2008 returns was 10/15/2009. Therefore, you must either be able to apply the 2008 excess to a later year of remove the amount of the excess to stop the annual accrual of 6% excise taxes.
You have already incurred a 6% excise tax for 2008. Another 6% applies for 2009 unless you are able to apply the excess as a 2009 regular Roth contribution OR took a distribution in 2009 which would have reduced or elimated the excess. These options are reported on Form 5329 and any distributions on Form 8606. If neither of these apply, then you move forward to this year.
For 2010, if you remove the amount of the excess prior to year end, you avoid a third 6% charge. Earnings are NO LONGER part of your distribution as that only applies if you correct the excess prior to the extended due date. When removing the excess, do not mention a corrective distribution to the Roth custodian, just ask for an early distribution in the amount of the excess contribution. You would report that distribution on Form 8606, but it would be tax free since it is a distribution of your regular contributions. You would also file a final 5329 for 2010 showing that the excess amount was removed and that would prevent a third penalty. As indicated above, you could also apply the excess as a 2010 regular contribution IF you are eligible and do not otherwise make a 2010 contribution. That would avoid having to take any money out of the Roth and would also end your 6% excise taxes with 2009.
Again, there is no way to get this money into a TIRA by recharacterization. The IRS may also bill you interest on the late payment of the 2008 excise tax, which you can file with a stand alone 5329 for 2008.
Permalink Submitted by Mike Hunt on Thu, 2010-03-18 23:56
and by excess I meant I was still under the $6000 cap (I am over 50). I was limited to a reduced amount (about $2000) since I was in the phaseout window, so about $4000 has to come out. Just wanted to make sure you knew it wasn’t money over and above $6000.
Change anything else.
Permalink Submitted by Alan Spross on Fri, 2010-03-19 02:08
OK, the only difference is that you are dealing with about $4,000 as the excess amount that would be handled as specified previously. The allowed amount under phaseout would not be affected.
Permalink Submitted by Mike Hunt on Fri, 2010-03-19 16:30
So tell me if what I am being advised is correct:
I am being told by Fidelity that since I made the 2008 contribution for 2008 in April 2009, it is considered a “timely” removal since it goes by the year in which the contribution was made (2009), not 2008. Therefore, the 6% penalty would not apply, but I would pay the taxes and 10% penalty on any gains.
Permalink Submitted by Jose Morales on Fri, 2010-03-19 18:14
The deadline to correct a 2008 contribution, regardless of when it was made, is your tax filing due date plus extensions. If you filed your 2008 tax return in a timely manner you would have had until October 15th to remove the excess plus any earnings attributable to the excess in order to avoid the 6% penalty. This deadline has already passed. You must pay the 6% tax penalty on the excess contribution amount, you do not have to remove the earnings. As Alan stated, you can apply the excess contribution towards a 2009 Roth IRA contribution if you are eligible to make a contribuiton for this tax year.
Permalink Submitted by Alan Spross on Fri, 2010-03-19 18:15
Well, it’s not correct, but the confusion is understandable due to lack of clarity in the IRS Pubs and even the Regs, where they keep referring to contributions “made during a tax year” when they really mean “made FOR a tax year”.
First, I would verify whether Fidelity assigned your contribution to 2008 or 2009. Errors in assigning the year frequently made for contributions made between 1/1/ and 4/15 of any year. But if they assigned it to 2008 as you intended, it was made FOR 2008 and the extended due date is 10/15/2009 for 2008 returns. This is logical when you realize that your eligibility to make the contribution and therefore the amount of that contribution is fully determined by your 2008 income (and age for catchup contributions), not your 2009 income.
To add to the inconsistency and confusion, had you corrected this excess prior to 10/15/2009 and had earnings returned to you, the earnings would be taxable in 2009 because you actually made the contribution in 2009. The inconsistency between this and the above is what further adds to the confusion. And perhaps this is what contributed to Fidelity’s confusion. The year you physically write the check matters for one facet of the correction, but not for determining the due date.
To summarize, Fidelity thinks your extended due date for this contribution is 10/15/2010 because you actually made the 2008 contribution in 2009, and that is also why they feel an earnings calculation is required for a corrective distribution. I would suggest elevating this issue to a senior tax person in their retirement unit, and then they should change their opinion. Let us know what happens. Meanwhile, if I can find a clear and simple regulation on this I will add it to this post later.
Permalink Submitted by Mike Hunt on Fri, 2010-03-19 19:30
They are investigating based on your collective responses. I am not eligible to make a 2009 Roth contribution (income cap).
When I go back to 2008 TurboTax and adjust the roth contribution down to the corrected amount ($2200), it generates a Form 5329 showing the excess ($3800)and the 6% tax on it on lines 24 and 25 respectively (supporting what you guys are telling me).
So bottom line, do I owe them $228 (6% of 3800) for 2008 AND 2009, or just 2008 so far? If I get it out before 4/15 of this year, do I avoid owing the $228 for 2009?
Permalink Submitted by Mike Hunt on Fri, 2010-03-19 19:51
Their explanation is based on three points:
1- They think Turbotax is creating the 5329 because it does not have or see a form 1099-R showing the removal of the money in 2008. Thus, TT is assuming that I carried the excess contribution forward to 2009, which is an automatic 6% penalty. They are suggesting writing a “letter of explantion” to the IRS when I submit my 2009 taxes.
2- Form 590 – p.48
3- Section 408 (d) (4) of regs
Permalink Submitted by Alan Spross on Fri, 2010-03-19 20:20
So far it is owed for 2008 and 2009. The 2009 penalty was incurred as of 12/31/09, and you would not incur another one until 12/31/2010. 4/15/2010 has no relevance to this situation.
Therefore, there is no rush to remove the excess right now. You could leave it in the Roth until December and hope it generates earnings which will stay in the Roth and become tax free when your Roth is qualified. But don’t forget to remove the excess amount prior to year end 2010 so you do not get hit again.
Your total bill would be:
For 2008: $228 plus interest on that IF the IRS bills you interest
2009: $228 – no interest if paid by 4/15
2010: Nothing for the corrective distribution reported on Form 8606 and no further excise tax on your final 5329 with 2010 return. Must take out the excess amount by year end. All earnings stay in the Roth.
Re Fidelity’s most recent explanation:
All the references are predicated on the assumption that “the taxable year” is the year the contribution is made (2009) and not the year it is FOR or applied to (2008). The code sections they reference do not define this further. The issue is “the taxable year”, and we have to know which year that is. Once we know that, everyone agrees what the extended due date is for that particular year.
Sec 219(f)(3) deals with IRA contributions and their limits and states that an IRA contribution made after the end of a year for the prior year is deemed to have been made on the final day of that prior year. In other words, your contribution is deemed to have been made 12/31/2008, which explains why “the taxable year” is not defined further in other places. But is SHOULD be explained more clearly on p 48 of Pub 590.
Copy of Sec 219f:
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f) Other definitions and special rules
(1) Compensation
For purposes of this section, the term “compensation” includes earned income (as defined in section 401(c)(2)). The term “compensation” does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. The term “compensation” shall include any amount includible in the individual’s gross income under section 71 with respect to a divorce or separation instrument described in subparagraph (A) of section 71(b)(2). For purposes of this paragraph, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6).
(2) Married individuals
The maximum deduction under subsection (b) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws.
(3) Time when contributions deemed made
For purposes of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).
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