Documenting excess Roth contribution if B/D will not issue an updated 1099

Submitted by Mike LaRose on Tue, 2017-04-04 19:09

I have a client where she made a contribution for the 2015 TY. of course, she was not eligible. The B/D states they do not issue an updated 1099 for previous TY. How will the client document the removal of the contribution plus the earnings to the IRS?

Thanks,

Mike



Submitted by Alan - IRA critic on Tue, 2017-04-04 20:38

If the excess contribution is returned with earnings by the due date, the 1099R will be coded in Box 7 to indicate which year the earnings are taxable. A 1099R issued Jan, 2017 is a 2016 1099R with Code 8 indicating the earnings are taxable in 2016, and Code P if earnings are taxable for 2015. How is the 1099R coded? The return for 2015 should also have included an explanatory statement regarding the corrective distribution.

Submitted by Mike LaRose on Tue, 2017-04-04 21:25

Thanks for the explanation. We havent removed the excess contribution from 2015 yet. She just discovered the an error that excluded her from contributiong to the Roth. When I visited with the b/d pertaining to the situaiton, they informed me that they will not generate a corrected a 1099. thanks again,Mike

Submitted by Alan - IRA critic on Wed, 2017-04-05 00:39

The deadline has passed to remove a 2015 contribution with earnings, and therefore a 6% excise tax for 2015 and 2016 has been incurred. But if no distribution has been taken, what 1099R are you asking about? Did the client withdraw the amount of the excess without earnings?  If so, when?

Submitted by Mike LaRose on Wed, 2017-04-05 17:48

I am trying to think thru the situation, find a solution, and assist the client in making this right.1)At this point no w/d has been made. 2) The w/d of excess contribution plus earnings will be made this week. 3) B/D stated they will not generate a corrected 1099 after the w/d of excess contribution and earnings is made. 4) I would like to have a game plan for how the client addresses the IRS w/o the documentation of a corrected 1099.My apologies for poor communication.Mike

Submitted by Mike LaRose on Thu, 2017-04-06 00:03

Curious, would a 2016 penalty still apply even thought she hasnt filed 2016 taxes?

Submitted by Mike LaRose on Thu, 2017-04-06 00:04

Curious, would a 2016 penalty still apply even thought she hasnt filed 2016 taxes?

Submitted by Alan - IRA critic on Thu, 2017-04-06 00:07

  • Return of an excess contribution with earnings for a 2015 excess has a deadline date and that date was 10/15/2016. Therefore the client must now select the options for eliminating the excess and ending the excise taxes AFTER the due date. Taking a distribution of the amount of the excess (no earnings distributed) will eliminate the excess, but the excise taxes will be due for 2015 and 2016 on Form 5329 for each year. A 5329 will also be filed for 2017 indicating the distribution and reduction of the excess to 0. And Form 8606 will be used to report the distribution that will be non taxable since it is a return of a regular Roth contribution.
  • There is another option. If client was eligible for a Roth contribution for 2016 but did NOT make one, Form 5329 will apply the excess from 2015 as a 2016 contribution. The excise tax will only be owed for 2015. If a non corrective distribution was taken in 2016 that will also end the excise tax with just 2015. If client is eligible for 2016 and has made a 2016 contribution he could also remove the 2016 contribution with earnings and that will create “space” to apply the 2015 excess. The best option may depend on the amount of gain or loss on the 2016 contribution if one was made. The choices are complex, but if you look at Form 5329 you can see how it works with respect to prior year excess contributions.

Submitted by Mike LaRose on Thu, 2017-04-06 21:14

Thank you, Alan. Very insightful. I appreciate it. Mike

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