IRA withdraws exceed excess contributions for 7 years
I met with a person who rolled over his monthly pension amounts into his IRA for 7 years. Since the monthly pension amounts are not eligible for rollover, they are considered excess IRA contributions subject to the 6% excise tax PER YEAR. This error was just brought to his attention and he wants to fix the situation.
My issue is that he also withdrew money from this IRA every year, and the amounts withdrawn ($105,000) exceeded the ineligible IRA contributions ($29,000). I wanted to see if I could make an argument that he corrected the excess contributions every year, thereby eliminating the excess contributions, but I am unable to find any research to support my argument. If he argues that he corrected the situation every year, then there would not be any excess contributions and the form 5329 is not needed.
However, if our argument will not work, then failing to file the f5329 will create and endless statute of limitations. I calculate the excise penalty to be $5397.
Any advice is greatly appreciated.
LIsa
Permalink Submitted by Alan - IRA critic on Tue, 2014-11-04 01:10
There is no need for making a case. Form 5329 itself automatically takes distributions and applies them to reduce the excess balance. All the person must do is complete the 5329 lines as directed. Of course, this process must start 7 years ago and it remains to be seen if the distribution timing will eliminate all the excess charges. While the 5329 can sometimes be filed by itself, the IRS technically asks for a 1040X for each year for which a 1040 has been filed even though this matter does not affect the rest of the return. If these rollovers included 2014, the 2014 excess can be corrected in the usual manner (requires earnings calc), and in the last year the 5329 will show a complete elimination and no penalty, but still needs to be filed to document the distribution. The 2014 form can just be filed with the 2014 1040.