Roth conversions prior to 2010 – income exceeded MAGI limit
Prior to 2010 and the lifting of the MAGI limit for Roth conversions, a client converted one TIRA account per year to Roth IRA in successive years where his income exceeded the MAGI limit for Roth conversions. Client is now in his 80s.
What is the consequence(s) of his actions ?
Permalink Submitted by Alan Spross on Mon, 2010-05-24 23:11
Client can still recharacterize the 2009 conversion, at least if client filed 2009 on time or filed a timely extension by 4/15. For years prior to 2009, client has a failed conversion and those are treated as an excess REGULAR Roth contribution. This triggers the 6% excise tax for each year a contribution (conversion) remains in the Roth.
But when the 6% excise tax is triggered, only the actual conversion amount with no adjustment for earnings should be distributed. No tax would be due for these distributions because tax was already paid for the conversion. Early withdrawal penalties would also not be due because he was beyond 59.5 when these conversions were made.
If client was not eligible for ANY of the Roth contributions he made, there is another problem because the 5 year clock never starts until a valid contribution is made. That means that the earnings in the Roth IRA will not be qualified since he will not have met the 5 year requirement. Of course, anyone can convert in 2010, so he should make enough of a 2010 conversion to get the 5 year holding period started, and any earnings would then be tax free by 2015.
Note that there is NO statute of limitations for excess contributions, although the IRS does not have effective control and monitoring of various IRA infractions. There has not been a track record of levying severe penalties when infrations are not discovered for many years, but that leniency could end at any time.
Permalink Submitted by mk foss on Tue, 2010-05-25 00:11
The IRS has been lenient about penalties when the taxpayer comes forward with the problem. Usually that is done by requesting a private letter ruling to undo the failed conversions. There are IRS fees associated with private letter rulings and you need an expert to write it up and shepherd it through the IRS (in my opinion). This client may have an additional problem. If the conversions had not occurred there would have been RMDs for the erroneously converted IRAs. I have seen private rulings where IRS dealt with missed RMDs as part of the “fix” for a failed conversion. This is a very complicated problem.
Good luck.
Permalink Submitted by Bruce Steiner on Tue, 2010-05-25 02:33
You’re essentially asking the IRS for an extension of the deadline for recharacterizing. The IRS’ fee for the application is $4,000: http://www.irs.gov/irb/2010-01_IRB/ar13.html. There will also be legal fees involved.