AMENDED TAX RETURN – NO LONGER ELIGIBLE FOR IRA
Situation:
Taxpayer was eligible and made a Roth IRA contribution in 2007.
In 2010 taxpayer amended the 2007 return for unrelated changes but is now no longer eligible for the Roth contribution.
Questions:
Does the taxpayer have any time to recharacterize the contribution?
Does the taxpayer have any time to withdrawal the contribution & earnings and just pay tax on the earnings (on the 07 1040-X)?
Will the 6% excess tax automatically apply on the excess contributions & earnings for 2007, 2008, 2009 and 2010?
Permalink Submitted by Alan Spross on Sat, 2011-01-22 00:02
The answer is No to the first two questions, since the deadline for a timely rechracterization was 10/15/2008. This is true even though the taxpayer may not have been aware of the added income in 2007.
At this point the correction must be made in accord with procedures after the extended due date. But perhaps the excess can be automatically applied in 08 through 2010. In those years if taxpayer is eligible for a Roth contribution that they did not make, the excess can be applied to the later year on Form 5329 and that would end the 6% charges. The excess is also corrected if the taxpayer took a distribution from the Roth in those years.
If neither of the above applies, the 6% is owed for 07-2010 and a stand alone 5329 should be filed for 07-09 and added to the 2010 return to pay the 6% excise tax.
The excess amount then needs to be removed before the end of this year to avoid another 6% tax, but the earnings do not come out. When the 6% tax is due, the earnings always remain in the Roth. Since there is no additional 6% tax until year end 2011, there is no rush right now to remove the contribution. May as well let it generate more earnings.
But taxpayer should still pay the excise taxes due for the 4 years passed ASAP because the IRS will charge interest on the late payment of the 07-09 6% excise taxes.