IRA withdrawal mess

Submitted by John Stevens on Sat, 2020-03-07 19:56

Prospect- had 12k go in as a Roth for 2017 and 2018, prospect made too much money for a Roth, and his then accountant took the 6k contribution as a deduction for 2017, then the prospect got nervous in 2018 and transferred his Roth IRA to another broker dealer, he was then informed by the IRS that he made too much money for a Roth (so he paid a penalty for what appears as a backdoor conversion?) and then he pulled the money out from the 2nd broker dealer and now has a check for <12kk and is now sitting on this check that says it is from a Roth account - so where does he rollover this check? Back to a Traditional IRA right? Since he was never eligible for the Roth in the first place. Will a another broker dealer take a check that says it is from a Roth and allow him to put back into a Traditional IRA? What form will a CPA/EA use to explain this mess to the IRS. Please take two aspirin after reading this rant. thanks John from Ohio



Submitted by Alan - IRA critic on Sat, 2020-03-07 20:46

  • A total mess. First priority is what to do with the check. The check “may” be a distribution of the prior excess contributions, even though short of 12k. If the original excess contributions were not able to be applied to 2019 and were not otherwise withdrawn previously, then this distribution should be used to correct the excess balance and end the annual 6% excise tax, therefore it should not be rolled over. Be sure you know exactly what else was done he may have forgotten or is not telling you, since any other activity would derail efforts to clean this up.
  • Any possibility either of these excess contributions were recharacterized as TIRA contributions?  Probably not likely if the IRS already levied the excise taxes for variousl years. For 2017 it would be $360, or 2018 it would be $720, and also $720 for 2019 unless he was able to apply some of the excess to 2019 by NOT making a Roth contribution for which he was eligible. Therefore, he needs to indicate if his income was also too high for a Roth contribution for 2019, and if he made ANY IRA contribution for 2019.
  • Why would a tax preparer claim an IRA deduction for a Roth contribution, and even if that contribution was recharacterized, he would only qualify for an IRA deduction for 2017 if he (or spouse) was not an active participant in a workplace plan. This deduction is inconsistent to the point where it increases the possibility that something you were not told about was done. 
  • Is prospect single, and was there any change in filing status from 2017 on?  Is prospect covered by a workplace plan for all of these years? 
  • A Roth distribution cannot be rolled into any other kind of account than another Roth IRA. Or if this eliminates the excise taxes it should not be rolled over at all. Form 5329 needs to be filed for every year until the excess is eliminated starting with 2017. Of course, if he already paid the excise tax, he still needs to file the 5329, but add a notation that the excise tax was paid. These forms are cumulative, therefore the 2017 5329 needs to be done first, etc. 
  • This obviously could be very time consuming for you……………….

Add new comment

Log in or register to post comments