Transfer of taxable invest. account to a traditional IRA
A friend of mine is an investment advisor. In 2012 he moved $50,000 from a client’s money market account into a newly established traditional IRA in error. The $50,000 was the only amount put into this account and the current value of the account is just under the original $50,000. This fact was recently discovered and he is asking how it should be corrected. My first thought, is to close the account and treat the distribution as an excess contribution subject to a 6% excise tax. the investor is over 59 1/2 so no problem there. the Form 5329 would be filed in the year 2015, the distribution year. My question is should a 5329 need to be filed for 2012, 2013, or 2014 and does anyone have any other thoughts on how this should be handled? thanks in advance.
Permalink Submitted by Alan - IRA critic on Wed, 2015-02-04 20:21
Yes, the 50k is treated as an excess TIRA contribution (less any amount he was eligible to contribute but did not). The excess is subject to the 6% excise tax and a 1040X and 5329 should be filed for 2012 and 2013. If he was eligible to contribute for 2013, the 5329 will reduce the excess by another 5,500 for 2013 to apply what he could have contributed. Just follow the Inst for Form 5329. Now in 2015 whatever excess amount is left should be distributed and a final 5329 filed to show removal of the entire excess amount. There is no 6% tax for 2015. For any year the value of all his TIRAs is less than 50k, he only owes the 6% tax on the value as of the end of each year. The final issue is making a full explanatory statement with the 2015 return to convince the IRS that the removal of the remaining excess amount should not be taxable. He would probably have to submit a copy of the 5498 showing a rollover contribution in 2012 and a copy of the return showing no rollover reported. The IRS may or may not bill late interest on the late payment of the excise taxes.
Permalink Submitted by David Mertz on Fri, 2015-02-06 18:33
The custodian should be asked to report the distribution from the traditional IRA as a return of excess contribution after the due date of the tax return. As long as the custodian knows that this is such a distribtuion, the 2015 Form 1099-R for this distribution should show box 2a blank and box 2b Taxable amount not determined marked [EDIT: I originally said a zero in box 2a and box 2b Taxable amount not determined *not* marked, but Alan corrected me in his post below]. This specific reporting, described in the instructions for Form 1099-R, will help signal to the IRS that this is indeed a return of excess contribution after the due date of the tax return and is therefore not taxable.
Permalink Submitted by Alan - IRA critic on Fri, 2015-02-06 20:03
Permalink Submitted by David Mertz on Fri, 2015-02-06 20:46
Thanks, Alan, that teaches me to rely on my memory for things like this. You are correct, I should have said box 2a blank, box 2b Taxable amount not determined marked, but I had the same code section 408(d)(5) in mind. I’m making a note in my post to provide a correction. For the entire amount of this to be treated as a nontaxable distribution of an excess contribution after the due date of the tax return, it MUST be considered to have been a rollover, otherwise I believe the maximum excess that can be returned tax free is the amount of the regular IRA contribution limit. Certainly it’s going to be necessary to provide some explanation to the IRS.