Excess Roth IRA Contribution in 2010
My client made a large conversion in 2010 from his IRA putting it all in his ROTH IRA. The proper taxes were paid on the total amount from NQ funds. However, he did not take the RMD for 2010. Now we will have to correct the error by withdrawing the amount of the omitted RMD from the ROTH IRA. I believe he must also withdraw the estimated earnings for parts of either two or three years, I.E. 2010, 2011 and possibly 2012(?), on the missed RMD. That total amount must come out of the cash currently in the ROTH IRA.
Questions:
1.) What is the best way to calculate the earnings for each of the three years?
2.) Will there be a 6% penalty on the missed RMD plus earnings for 2010, 2011 and possibly 2012?
3.) What forms must be used to correct the error and for what tax year(s) must they be submitted?
4.) Is there any place where the correction to this problem has already been documented? If so where?
5.) Please offer any additional advice as appropriate.
Thank you very much for any help that can be provided.
Sincerely,
Bill Gislason
623-780-3737
Permalink Submitted by Alan Spross on Mon, 2012-04-02 22:22
Was the 2010 conversion for 100% of his TIRA, ie no TIRA balance existed after the conversion? If so, the only RMD to be dealt with is for 2010 and it will have to come out of the Roth as an excess contribution to the Roth IRA. The problem here is not earnings, but the 6% excise tax for an excess contribution that was not corrected for two years, ie 6% excise tax for 2010 and for 2011.
In the situation where an RMD is converted, the RMD is still deemed satisfied, but converting it results in an excess contribution to the Roth IRA.
If there was still a TIRA balance, then there are more issues to deal with? Please advise.
Permalink Submitted by Bill Gislason on Wed, 2012-04-04 22:59
Alan,
Thank you for your initial response. I’m assuming that TIRA means traditional IRA. If so then the answer to your question is that 100% of the TIRA was not taken in 2010 and there was still money remaining in the TIRA at the end of 2010. FYI my client has already taken the required RMD from the TIRA for 2011 in December of last year, and then converted the remaining balance to the ROTH IRA also in December, 2011. Thus the TIRA was totally closed by the end of December last year.
Permalink Submitted by Alan Spross on Thu, 2012-04-05 04:20
OK, as indicated in prior post, there are no earnings to be withdrawn here, the problem will be the 6% excise taxes due on the excess Roth contribution for both 2010 and 2011. There are also some reporting issues that are confusing but not that costly.
Because the 2010 RMD was converted, a 2010 Form 5329 must be filed to pay the 6% excise on the amount that would have been the 2010 RMD.
For 2011 the same amount is due since it was still in the Roth at the end of 2011. The 2011 5329 can be filed with the 2011 return or by itself if the 2011 return has been filed.
To correct the excess contribution, just ask the Roth IRA custodian to distribute the amount of the excess (no earnings calculations). This distribution will be reported on the 2012 return on Form 8606. It will not be taxable because it a return of a regular Roth contribution since the failed conversion amount is treated as a regular contribution and not a conversion contribution. Finally, a final 5329 will also be included for 2012 showing that the distribution taken has eliminated the prior excess amount. No further penalty.
Note: In the event that your client was eligible for a regular Roth contribution in 2010 that he did not make (must have had earned income or spouse must have had earned income), up to 6,000 of the excess contribution can be applied on Form 5329 by just completing the Form correctly. This is also true for 2011. Up to 12,000 could be applied this way if these conditions are met. And if so, the 6% tax would be eliminated on the amount able to be applied. Similarly, if he took any Roth distributions in 2010 or 2011, the 5329 would apply those to the amount that needs to be taken out. Therefore, he needs to look at both of these possible situations to fill out the 5329 forms correctly. Either one of these situations would reduce the 6% excise taxes d
This procedure is not clearly outlined in Pub 590 or other IRS publication in a comprehensive manner. However, note p 60 of Pub 590 “Applying excess contributions”. Also, p 46 explains correction of excess contributions under “Tax on Excess contributions”, and the final paragraph “Excess contributions withdrawn after due date of Return”. Same rules apply to excess Roth contributions as TIRA contributions except that there is no deduction to correct.
Permalink Submitted by Bill Gislason on Thu, 2012-04-05 20:24
Alan,
Thank you for your last post as that has provided sufficient information to allow me to solve the problem for my client. Your expertise and helpfulness have been sincerely appreciated.
Bill Gislason