Excess Contribution – Traditional IRA/Roth IRA
This past week I rolled over part of my 401k to a traditional IRA. I purchased a new issue corporate bond in the IRA which has a settlement date of 12/29. The check is to be mailed from my 401k plan provider on 12/22. My IRA broker says that if the check doesn’t arrive in time that the bond will have to be sold. I hate to lose the bond which is paying 7% and would also likely incur losses on the bond sale due to large spread on bid/asked prices. (FYI – the 401k plan provider would not wire transfer nor overnight mail the check).
I would like to have a contingency plan in case the check doesn’t arrive in time. My plan is to make a 2008 contribution of $200k, the purchase price of the bond, to the IRA account. Then immediately withdraw the same amount (hopefully still in 2008) once the check arrives from the 401k plan provider. There should be no earnings on the contribution since it is immediately withdrawn and no 6% additional excise tax or income tax on the withdrawal since it is withdrawn prior to return due date.
My concern is that I contributed $6,000 in January 2008 to a Roth IRA in a 7 yr CD. I have read that excess contributions must first come out of the Roth IRA account before the Traditional IRA account. I would hate to do this since I would have to break a CD earning a high interest rate as well as pay an early withdrawal penalty.
My question is whether it would be possible to consider the excess contribution to be the $200,000 put into the Traditional IRA since it was put in last. Or could I just ignore the excess contribution aspect entirely and treat it as a contribution returned before return due date in accordance with IRC 408(d)(4)? If neither of these is allowable, do you have any other ideas on how to work around this potential problem? Thanks.
Permalink Submitted by Alan Spross on Sat, 2008-12-20 23:06
I cannot figure a viable way out of this mess, except rolling another IRA into this account, but if you had another 200.000 IRA I know you would have already planned for the rollover.
And if a prospective solution surfaced, it would all be dependent on the IRS custodian determining in advance how they would reflect transactions on their information returns to you and the IRS.
I doubt that the custodian would accept a 200,000 regular contribution since this seems to be in violation of Sec 408(a)1 copied here:
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a) Individual retirement account
For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
(1) Except in the case of a rollover contribution described in subsection (d)(3) in1 section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16)2 no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).
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And if you try to replace the direct rollover check with your own check you run into various problems with 1099R reporting from the 401k, coding for a direct rollover, no mandatory withholding, and possibly a prohibited transaction depending on how the custodian handles two sets of deposits. Then there is the unintended consequences of not being able to anticipate exactly what your custodian is going to do and how it may affect what forms the plan issues.
If the plan makes good on their issue date, it appears that the IRS custodian should have it in time. Maybe there is something you can do to get their processing of the check expedited upon arrival.
Or is the check being mailed to you for delivery?
Permalink Submitted by Terry Koch on Sun, 2008-12-21 01:31
The check is being mailed directly to the IRA custodian. If I would have had it mailed to me, the 401k provider would have withheld the mandatory 20% — according to them. Hopefully it will arrive in time.
Here is another thought. I am not sure if the IRA custodian would go along with it, but could you tell me if it would run afoul of any IRS guidelines. Have the broker put the bonds temporarily in a “house” account (in their name – not in mine) and charge me interest on the $200,000 until the check is received. They know that the check is coming as I was on a conference call with the broker and 401k provider when the withdrawal request was made. I could also deposit $200,000 into a separate taxable account to securitize the loan if necessary. Once the check was received, the bond would purchased by my IRA account from the broker’s “house” account.
Thanks very much for your help on this.