Excess Roth Contribution
At the beginning of 2010 I received a check in settlement of an SEC proceeding against the mutual fund company that held my Roth IRA account. The check was payable to the custodian of my Roth account. I was advised in the information statement that accompanied the check to have it deposited into my Roth account. I sent it to the custodian with instructions to make the deposit. I was further informed in the information statement that as a general rule distribution payments from the settlement fund received as a result of the investment held by my IRA do not constitute a “contribution” to my IRA for purposes of determining my maximum yearly contribution to my IRA. Last week I received a Form 5498 showing a contribution to my IRA in 2010 for the amount of the check. Since I relied on the previous statement, I made contributions to another Roth account with a different mutual fund for the maximum $6,000 I was qualified to make. If this check amount is now being reported to the IRA as a contribution, then I am over my maximum contribution amount for 2010 by the amount of this check – approximately $400. Do I now have to pay a penalty on an excess contribution? Any guidance you can give me will be greatly appreciated.
Permalink Submitted by Alan Spross on Mon, 2011-05-23 16:31
“Restorative payments” should be processed by the IRA custodian as a non reportable rollover contribution, and certainly should not be reported on a 5498 as a regular contribution.
Check your 5498 again, and if it is reported as a regular contribution, ask custodian to revise it. Perhaps there was miscommunication when you sent them the check. Was it clear to them that this was a settlement?
Note: There could also be issues if the assets included in the settlement were not Roth IRA assets at the time of the settlement window, but were in your TIRA that you converted.
Permalink Submitted by Jane Ackerman on Mon, 2011-05-23 17:28
Alan,
The amount is listed in box 10 of the Form 5498 and there is nothing on the form to indicate that it is anything but a regular IRA contribution. It should have been clear to them that this was a settlement since the settlement check I received had all that information attached to it and I did not detach the check from that information but sent the whole thing on to them with a letter of instructions. I did not have any TIRA accounts only Roth accounts so there was no issue of conversion. I will contact the custodian and ask them to correct the Form 5498. Do non-reportable rollover contributions get reported to the IRS on a different form?
Permalink Submitted by Alan Spross on Mon, 2011-05-23 20:45
Actually, they should rescind it because no 5498 should have been issued. It should have been handled as a non reportable transfer. There is no other form for notifying the IRS about non reportable transfers and the IRS does not want to be notified of them.
For example, Schwab handles these by asking that the check be endorsed and shown “for deposit only to IRA A/C # xxxxxx”. They do not issue a 5498 and the legal firm handling the settlements does not issue a 1099R.
Here is an article by Bruce Steiner, a frequent contributor here on Restorative Payments. Perhaps a copy of the article can help you to convince them to rescind the 5498. Of course, if they don’t you can always take it up directly with the IRS if they inquire about an excess contribution. The problem is that the IRS often lets years go by so you would be in limbo waiting for the IRS to contact you. Worse yet, there is no statute of limitations if the IRS still considered this an excess contribution.
http://trustsandestates.com/wealth_watch/wealth_Watch_News_08222007/
Permalink Submitted by Jane Ackerman on Mon, 2011-06-06 20:15
Alan,
I wanted to let you know that I was successful and have today received a copy of a corrected 5498 Form which shows no ROTH contributions for 2010. I really appreciate your help with this.
Permalink Submitted by Alan Spross on Mon, 2011-06-06 20:24
Good, glad you were successful.
Permalink Submitted by Bruce Steiner on Mon, 2011-06-06 22:03
I updated my article on restorative payments for the June 2011 issue of Trusts & Estates. Subscribers can access it either in the print version or online. I’ll be able to make it available sometime in August.
Permalink Submitted by Alan Spross on Mon, 2011-06-06 23:25
Bruce, will look forward to reading it.
Speaking of trusts and estates, many of these settlements take so long before checks are issued, there are probably more than a few IRA beneficiaries attempting to get these checks reissued due to the death of the original IRA owner. I am waiting for a settlement check now that covers infractions made as far back as 1999.