prior year excess contribution – can Form 5329 and Form 8606 be filed together without amending?

Submitted by Dana Evans on Wed, 2022-11-23 14:41

Hello! I have a mess! First time client asked me to file 2021 individual returns but in my research I found that client didn’t report or claim some prior year IRA contributions going back to 2010. I am working my way through these years to submit Form 8606 as needed. It is pretty straightforward until I reach 2018. I know the Form 8606 can be submitted without amending any of these years.

In 2018, client contributed $6250 TIRA (fully reported / deductible) and $600 ROTH. Client was over 50 so the limit is $6500 therefore the excess is $350. Since client claimed the full $6250 on the original Form 1040 as a deduction, I would like to keep this deduction and have the $350 excess removed from the ROTH. From my research on irahelp.com, I do believe this is the correct action but if anyone disagrees, please let me know.

Note: for 2019 and future tax years, the client is Married Filing Separate, so she is no longer allowed to contribute DIRECTLY to a ROTH, so the absorption method will not work in this case.

For 2018, I will need to prepare both Form 8606 (to only show the continuation of TIRA basis) and a Form 5329 to show the penalty for excess contribution to the ROTH. Can I file the Form 5329 with the Form 8606 without amending the entire 2018 return?



Submitted by Alan - IRA critic on Thu, 2022-11-24 00:35

  • FIrst, you should save yourself the hassle of filing 8606 forms for closed tax years. There is a large amount of anecdotal evidence that the IRS does nothing with these forms, may even discard them. They do not maintain any tracking for IRA basis. You should do the calculations and list how much IRA basis existed for each of these years and how much was recovered (claimed on distributions). Then make a note that on the next 8606 that should be filed to update the existing basis on line 2 of that 8606, so the amount will be correct into the future. Just keep the notes in case the IRS inquires about the accumulated basis, but they never do. Therefore, it appears there is no need to file any 8606 form except to report the 2022 Roth distribution.
  • IRS Regs state that when there is a combined TIRA and Roth excess that is not removed prior to the due date, the Roth contribution must be treated as the excess one, and that mathes your plans.  2018-2021 5329 forms must be filed to pay the 6% excise tax each year. The IRS may or may not accept these alone and might return them and ask for a 1040 X  with the 5329 forms. A Roth distribution of 350 done before year end will cure the excess in 2022, and there will be no 2022 excise tax, but 2022 5329 must be filed with the 2022 return showing that this distribution eliminated the excess. An 8606 must also be filed to report the Roth distribution as coming from the regular Roth contribution balance, and no income taxes will be due.
  • The IRS may or may not bill late interest on the late paid excise taxes shown on the 5329 forms.

Submitted by Carol Redd on Fri, 2023-06-23 19:06

Hi DSEYour post of 11/23/22 only mentions that the client did not report or claim some tIRA contributions going back to 2010.   Have you determined that those were all NON-deductible for those years?  Is that why you write: “For 2018, I will need to prepare both Form 8606 (to only show the continuation of TIRA basis)”.  IF these contributions were in fact deductible, isn’t the deduction lost and not allowed to be treated as having basis??I’m just asking, hoping to learn something.

Submitted by Alan - IRA critic on Sun, 2023-06-25 00:33

If a TIRA contribution is not deducted, it is treated as a non deductible contribution to be reported on Form 8606. This is true whether the contribution could have been deducted or not. Since the 2018 contribution was deducted and there were no distributions, no 8606 is required for 2018. The basis carries over from there to future years, and any future year TIRA distributions need to be reported on Form 8606 to correctly apply the basis.

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