IRA Age Limit
Bank issued an IRA CD for my mother at age 91. Now that the CD has ended I am learning the tax impact of getting an IRA that we did not want. Question, do I have any recourse to the bank to redo what has been done, this should have just been a regular CD not anything connected to an IRA for a person at age 91 at the time. Can the bank be asked to submit paperwork to IRS to show that the IRA was issued in error so that when the IRA ended it does not have to be considered a distribution for the total amount. If this were a standard CD the earning would have been about $2000 for the 13 months. But as it was treated there was no 1099-R at the end to the first year but a Form 5498, which I am finding is not reported on the 1040. And yes, there was no RMD because I was going to end the IRA CD at the end of the 13 month period. Then the 1099 R comes this year showing the total amount as a distribution and it appears fully taxed. Several terrible mistakes on my end and I feel the banks side.
Thank you.
Permalink Submitted by Alan - IRA critic on Sat, 2021-02-13 19:20
Where did the funds come from to fund this IRA? It would have had to be a rollover from another retirement plan. Who held the prior IRA account if there was one, if not the same bank? If these funds were not IRA money in the first place, a costly error was made. Please advise how this happened, ie the process used to create this IRA.
Permalink Submitted by William Walker on Sun, 2021-02-14 15:29
thank you for your reply. the Form 5498 does shows a rollover contribution but the funds that started this were just from a checking/savings from another CD ( not a retirement plan or IRA). We were just looking for a new CD to put the funds in, not an IRA. I have written the bank an initial letter explaining what I have just recently found out via input of taxes for 2020 asking if they would erase all of this and treat it as if it were a regular CD. Awaiting a response from the bank. Thank you.
Permalink Submitted by Alan - IRA critic on Sun, 2021-02-14 16:20
Unfortunately, they will not correct this unless they were solely responsible for the error. Probably better that you get their response sooner than later, so the error can be rectified. Since there was no account to roll over, and she did not have any earned income for the year of the CD opening, the entire amount of the CD must be treated as an excess IRA contribution for the year in which the CD was opened. Please advise the year it was opened because the corrective procedure differs depending on whether it was opened in 2020 or prior to 2020.
Permalink Submitted by William Walker on Mon, 2021-02-15 13:54
The IRA CD was opened May, 2019.Thank you.
Permalink Submitted by William Walker on Mon, 2021-02-15 13:58
This IRA CD matured in June of 2020 where we then put it in a regular CD. If I am unable to get the bank to correct the original issue would it be possible to reverse the new CD into the old IRA CD so that there would not have been a distribution that would have been taxable in 2020?
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-15 17:46
No, that would just be compounding the error since this amount was never eligible for deposit into an IRA.
The excess contribution was removed with allocated earnings (the interest) by the due date for the 2020 return. That eliminates any excise tax for 2019, but the interest withdrawn will be subject to ordinary income tax on the 2019 return (will require an amended return). The problem is that the bank does not understand what happened, so the 1099R you received is likely coded with a 7 in Box 7 instead of the code for excess contributions, which is Code P. Call the bank and explain what happened and request that the 1099R be corrected to show Code P, with only the interest in Box 2a, since that is what was actually done. Ask to talk to a senior officer since the average clerk will not understand this at all. While I do not expect the bank to agree to treat this as the withdrawal of an excess contribution, at least you can tell the IRS you tried, and then an amended 1040 for 2019 can be filed with a complete explanation that 5498 showing a rollover contribution was incorrect since there was no distribution, and that deposit must be treated as an excess IRA contribution. Since this situation is complex, you will probably need to hire a tax professional to prepare the explanation with the 2019 amended return and submit Form 4852 showing the corrections to the original.
Again, getting the bank to agree to amend the 1099R you received is a long shot, but you are required to try before issuing your own revision on Form 4852. You might want to file an extension for the 2020 return, since with the above procedure the 2020 return would not be affected and no distribution would be reported on the 2020 return.
You may need a tax pro to file these forms on her behalf. As for taxes, the only cost will be tax on the interest the CD earned, and that is not much given today’s interest rates.
Permalink Submitted by William Walker on Mon, 2021-02-15 20:49
Thank you very much. Ok, I am a Turbo Tax user but based on your earlier suggestions went back into TT and came up with some of the same terminology that you provided here. So I think I have a path now.