Mistaken $40,000 contribution to ROTH in 2014
With our ability to move money from outside accounts into a ROTH at a particular institution, my client inadvertently transferred $40,000 into his 2014 ROTH. He cannot even contribute to a ROTH. Rather than a misapplied payment, my home office is considering this an excess contribution for 2014 (no 8606 has been filed or any other reporting) and is transferring out a bit less than the $40,000 due to a small loss in the investments of this account at this time. That $40,000 was not invested! Is all of this necessary in a current year. I fear that filing an 8606 for 2014 with $40,000 may raise computer flags and no client needs that. Is there a practical approach to this?
Permalink Submitted by Alan - IRA critic on Mon, 2014-02-24 22:34
What was the outside account? This could be either a conversion or a regular Roth contribution depending on how it was recorded. If the funds came from a taxable account it could only be an excess regular Roth contribution corrected in the usual manner. If a conversion, the steps are more complicated. Where did the funds come from?
Permalink Submitted by Anna Hillman on Tue, 2014-02-25 18:10
It came from a non-qualified brokerage account.
Permalink Submitted by Alan - IRA critic on Tue, 2014-02-25 19:59
OK, then the 40,000 is just an excess IRA contribution that needs to be corrected. Since there is a loss, there should be no taxes on the corrective distribution. Client does not need to file an 8606 to report a non deductible contribution, but should include an explanatory statement with his 2014 return explaining what happened, that no deduction was taken and that the corrective distribution has been completed.
Permalink Submitted by Anna Hillman on Wed, 2014-02-26 18:44
Thank you…one final question which sort of started this. Because the IRA has lost a little bit of value at this point, my home office is following the 950 form for excess contributions and decreasing the $40,000 by the prorated loss so that the client gets back $39,969. The client does not really understand this and unless I say it is my fault (which it is not) home office will return the full $40,000. Is there a practical correction to this so that the client can get back the full $40,000? or is this all black and white?
Permalink Submitted by Anna Hillman on Wed, 2014-02-26 18:49
I know he has to report on the 8606 the non-deductible contribution. But, since it was a mistake is it still necessary? Form 8606. To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs.
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-26 21:35
An 8606 is NOT filed to report a non deductible contribution that is being returned or is an excess contribution being returned plus or minus allocated earnings. This is clear in the IRS 8606 Inst for line 1 of Form 8606. This is why I indicated to state that the excess contribution was NOT deducted in the explanatory statement, as there will be no 8606 to otherwise indicate so. As for the earnings calculation that is required in order to code the 1099R as a corrective distribution. Such a corrective distribution is required to purge the IRA of the excess contribution and to avoid the 6% excise tax. The client should be told that had their been earnings he would have been taxed and penalized on the earnings, and the IRA Rules similarly require that investment losses also be reflected in the corrective distribution. The earnings loss was not due to the IRA, but to the fact it was invested and if invested in the same way in his taxable account he also would have negative earnings.