Are unclaimed deductions penalized?
Great Q&A here as always! Hoping you could help us as well.
My friend had been making after-tax auto contributions for $2000 since 2018 to TIRA in excess. Without knowledge, he continued his tax filings every year since without disclosing this account or claiming any deductions. Realized mistake only this year.
I advised to immediately withdraw all excess till 2020 and recharacterize 2020’s to roth, then file 8606 for 2020 and 5329 for each year with 6% penalty cumulatively – $120, $240. No need of amendments till 2020 as deductions were not claimed.
Says, his advisor disagreed and to simply withdraw all $4330 (earnings + 2*2000) and just file 8606 for only 2020 backdoor. No need of paying excess penalty as contributions were after-tax, missed disclosure in tax forms and mainly that the deductions were never claimed in any of the years the excess is made.
Is this right?
Another friend wants to know if both roth-IRA and roth-401(k) through employer count towards the total contribution limits for Roth in an year or are they be treated differently?
Seems he already reached his Roth-401(k) limit via employer and mistakenly did a backdoor Roth-IRA as well for $6000 this year exceeding the 38K Roth -limit for the year.
Want to know if he needs to withdraw his 6K immediately and file Form 8606 part-I as TIRA excess? Or part-III as roth-IRA distribution? or both?
Much appreciated,
Patrick M.
Permalink Submitted by William Tuttle on Mon, 2021-09-27 15:04
Please clarify, it is not entirely clear what you are saying. Did the indivudal make $8,000 in traditional IRA contributions, but only deducted $6,000 resulting in $2,000 excess contributions. Or did they just make $2,000 in traditional IRA contributlon and not claim the deduction. The latter is not an excess contribution.
Only if they were excess contributions, file a 2018 Form 5329 to reporting the $2,000 excess contribution and pay a 6% excise tax on $2,000, a 2019 Form 5329 to reporting the $2,000 excess contribution and pay a 6% excise tax on total of $4,000 in excess contribution balance, a 2020 Form 5329 to reporting the $2,000 excess contribution and pay a 6% excise tax on total of $6,000 in excess contribution balance.
If these were excess contributions, recharacterizing the $2,000 excess to a Roth doesn’t help.
Regardless if these were excess contributions, file Form 8606s for 2018, 2019 and 2020 to report the $2,000 non-deductible contributions.
Only if these were excess contributions and the individual does not have $4,000 in 2021 contribution space would the excess have to be returned. This should be done as a normal distribution and not a return of excess contribution and earnings. They could simply tale the place of 20201 contributions and used to reconcile the excess contribution basis on a 2021 Form 5329.
Note: There are proposals in congress to remove the ability to do Roth conversions of traditional IRA non-deductible basis after 12/31/2021. If the $300 is the only pre-tax assets in all traditional, SEP and SIMPLE IRA accounts, the individual should do a Roth conversion of the entire balance before 12/31/2021. If the individual doesn’t want to pay the taxes on the $300 or has more pre-tax IRA assets and they they have a 410k, 403b or 4567b plan that accepts IRA rollovers. They can rollover the pre-tax and only the pre-tax assets in all traditional, SEP and SIMPLE IRA accounts to the plan and do a Roth conversion with little to no tax liability.
For the other friend, IRA and 401k contribution limits are separate and distinct.