Roth IRA Contributions/Distributions in Same Year, w;/SIMPLE Implications
Hello,
I am preparing a tax return for my client who is single, self-employed and age 68 at the end of 2017. He has both a Roth IRA and a SIMPLE IRA. He has been making contributions to and taking distributions from both accounts in 2017 without considering the tax considerations.
During 2017 he contributed $6,500 to his Roth IRA – $1,000 in May, $500 in August, and $5,000 in September. However, he withdrew $4,000 in September also. Would this $4,000 be viewed as removing a portion of the 2017 contributions, thereby reducing his total 2017 Roth IRA contributions to $2,500? Or is the $4,000 withdrawal viewed as a withdrawal of prior years’ contributions and earnings? Thereby keeping his 2017 contribution amount at $6,500?
He received a 1099-R for the $4,000 with Code T in Box 7. As far as I can tell, the Roth IRA was opened in June 2012. Does the 5 year rule start from the date the account was opened? If so, then it appears he has complied with that rule since the money was withdrawn in September 2017.
The answers to the questions above will affect whether a portion of his Roth IRA contributions will be disallowed due to his 2017 adjusted gross income, which is very close to the $118,000 threshold. If a portion of the Roth IRA contribution is disallowed, it will affect how much additional money he may want to contribute to his SIMPLE plan. His AGI already reflects a deduction for the $9,700 he contributed to the SIMPLE plan during 2017. The deduction for any additional SIMPLE plan contribution could potentially take his AGI below $118,000 and make the entire Roth IRA contribution amount allowable for 2017.
I’m not sure if this additional information has any effect on the potential disallowance/penalties on the Roth IRA or deductibility of the SIMPLE contributions:
1) The client withdrew $11,675 from the SIMPLE plan in December 2017. He received a 1099-R reporting the entire amount as taxable with distribution code 7.
2) He then took out another $40,000 from the SIMPLE plan in January 2018.
3) The client has already contributed another $6,500 to his Roth IRA in January 2018 for the 2018 tax year.
Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2018-04-12 00:43
If his first Roth contribution was prior to 2013, then his Roth is fully qualified and all distributions are tax free and do not need to be reported on Form 8606. Code T indicates that the distribution was not a return of specific 2017 contributions, therefore his contributions remain at 6500. If his modified AGI is too high then he has an excess Roth contribution and will have to request a corrective distribution. Any earnings on the corrective distribution will be taxable for 2017 and that could increase his excess Roth contribution. It may be simpler to pay the 6% excise tax if there is still a small excess created by the earnings removed with the initial excess. Or he could make additional SIMPLE contributions for 2017 which would reduce his modified AGI for Roth purposes.