Overcontribution after 2 years?

Submitted by Dan Garland on Wed, 2014-02-12 19:15

Have a question as to if anyone has any good solutions to a unique incident. (names changed to CLIENT and MRS for anonymity.

Situation description:
CLIENTs set up a non-deductible IRA at INSURANCE CO. for MRS. in 2009. They then planned to eventually convert it to a Roth IRA. A former employee with our firm set up this account and dealt with it until his departure in February of 2012. In April of 2009 two separate checks (from the CLIENT’s checking account) for $6,000 and $4,000 were sent to INSURANCE CO. and placed in a Variable Annuity IRA for the benefit of MRS. CLIENT. This mistake resulted in $10,000 of contributions in tax year 2009.

When the CLIENT family filed their 2009 taxes, their CPA did not take a deduction for the IRA contribution, nor did he file an indication of non-deductible contributions on form 8606.

These mistakes were not found until early 2011 when another advisor reviewed this account. In June of 2011 a request was made to INSURANCE CO. to return the excess contribution from 2009. INSURANCE CO. distributed $4,000 at that time, but coded the distribution as a normal, early distribution on the 1099.

Because of the timing in catching this error, INSURANCE CO. has told us that they have choice but to code the distribution as normal. This unfortunately resulted in triggering income taxes due on that distribution as well as the early withdrawal penalty (MRS. was under 59.5 at the time). This is particularly egregious as the original contribution was from assets that were already taxed (they came from the CLIENT’s checking account).

After discussions with the CLIENT’s CPA as well as the IRS and INSURANCE CO., it looks like the only way to get the CLIENT Family in good standing with the IRS is for them to pay the tax and penalty on the distribution from 2011.



Submitted by Alan - IRA critic on Wed, 2014-02-12 20:17

A retroactive 8606 can be sent to the IRS showing a 10,000 non deductible TIRA contribution for 2009 (but make sure that contribution was not for 2008 first). This can be done on a stand alone 8606. The following assumes this 10k was the only non Roth IRA accounts owned by the spouse. If so, this is what needs to be done:

  1. File a 2009 Form 5329 paying the 6% excise tax on the 4k excess contribution.
  2. Same for 2010, another 6% excise tax on Form 5329 because the excess was still in the IRA on 12/31/2010. A 1040 X should be filed with the 5329 attached.
  3. For 2011 1040 X include another 5329 showing the distribution of the 4,000 that corrects the excess amount. There is no penalty for 2011 and because of the 8606 filed earlier, the distribution will be tax free or nearly so if some earnings have accrued in the TIRA. A 2011 8606 will also be needed to report the distribution. Any penalty of 10% would only be on the taxable amount showing on the 8606, if any.
  4. Therefore, the distribution will be basically tax and penalty free (unless some earnings were generated). However, there are two years of excess contribution excise taxes @6% to pay (2009 and 2010), and the IRS may bill late interest on these payments.
  5. Above assumes this was spouse’s ONLY non Roth IRA account over this period. Otherwise, those other values would need to be shown on the 8606.
  6. The remaining amount in the TIRA will be mostly basis, and therefore could be converted mostly tax free.

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