New IRA formed from a taxable rollover
I have a client who took a substantial non-trustee-to-trustee premature distribution from his SEP in January 2013. Within the 60 day rule, he established two new IRAs and put 50% of this distribution into each. However, he was not aware of the one year look back and he had a non-taxable, non-trustee-to-trustee rollover in June of the prior year. The January 2013 attempted rollover does not qualify and would be considered a taxable premature distribution.
My question, however, is the tax treatment of the two new IRAs established in that now taxable distribution transaction. I believe the contributions to these two new IRAs are considered as excess contributions and subject to the 6% penalty unless withdrawn sometime prior to the filing of the 2013 tax return, including extensions. I do not believe there is any further income tax on these contributions to the new IRA’s.
Am I correct?
Thank you very much.
Permalink Submitted by Alan - IRA critic on Thu, 2014-04-10 18:18
Yes, you are correct except for the earnings on the excess contributions. The disallowed second rollover should be reported as taxable income on line 15a and 15b and the rollover dollars are excess regular IRA contributions. In the event that he qualifies for a regular IRA contribution, those rollovers are NOT excess and do not have to be removed. But for the excess that must be removed, the earnings on those amounts will be taxable on 15a and 15b and subject to penalty.