2 Indirect Rollovers
Client does indirect rollover of SEP IRA to traditional, completes rollover in May of 2017 within 60 days. Client does indirect rollover of Roth IRA to Roth IRA, completes rollover in June of 2017 within 60 days. I believe this creates an ineligible rollover, which creates an excess contribution. Is there any way to fix this now in 2018? What steps need to be taken to minimize IRS repercussions? – m
Permalink Submitted by Alan - IRA critic on Tue, 2018-04-24 22:56
There is no way to fix this, as the IRS does not even have the authority to waive the one rollover limitation on an individual taxpayer basis. The Roth distribution should be reported on Form 8606 using the usual Roth ordering rules to determine if any portion is taxable. As you indicated, the Roth rollover contribution is then an excess regular Roth contribution and must be removed with allocated earnings prior to 10/15/2018 in order to avoid the 6% excise tax. Worse yet, any earnings returned with the corrective distribution are taxable in 2017 and client probably just recently filed the 2017 return. Client obviously needs to start doing direct transfers.
Permalink Submitted by [email protected] on Wed, 2018-04-25 16:36
Thank you. When you say “The Roth distribution should be reported on Form 8606 using the usual Roth ordering rules to determine if any portion is taxable.” are you referring to the Roth distribution in 2017? So, they would have had to file the 8606 to report tax liability as appropriate for 2017? They may not have done this if they expected their rollover was appropriate. So, I see two things that need to happen – 1) they need to remove the excess contribution to Roth, which will need to be completed prior to 10/15/2018 to avoid 6% excise tax. This removal would include any earnings that occured. These earnings would then need to be added as taxable income for 2017, likely requiring an amended 2017 return. In addition, they need to amend their 2017 return by including an 8606 that was supposed to have been filed and likely wasn’t filed, to show any taxation that would have been due on the original Roth withdrawal (perhaps a Non Qualified Distribution with earnings subject to taxes). Is that correct? -m
Permalink Submitted by Alan - IRA critic on Wed, 2018-04-25 18:15
Yes, you are basically correct. The Roth distribution not eligible for rollover occurred in 2017, so Form 8606 would need to be filed with a 1040X if 2017 has already been filed. The amount that was rolled over to a Roth IRA improperly is treated as an excess regular Roth IRA contribution. This should be removed and any earnings would also be taxable on the 2017 1040X so the 1040 X should be filed after the corrective distribution. Most likely, the 8606 will not generate any taxes because client probably has enough Roth regular contribution basis that can be distributed tax and penalty free. The corrective distribution is not reflected on the 8606, but if there were earnings, the earnings would be taxable and subject to penalty.