2 years of accidental contributions from earnings to a Beneficiary IRA
Our clearinghouse did not produce a red-flag when client contributions for 2012 & 2013 we deposited into the client’s Beneficiary IRA. However, in 2014, the check to make a contribution was rejected since apparently safeguards were finally in place.
So now I am faced with a dilemma. How to move those contributions and associated earnings into a contributory IRA. First thought is to open up a Rollover IRA and do so. But if my assumption is correct, contributions cannot be made into a Rollover IRA either. Second thought is to have the clearinghouse re-characterize the previously improperly deposited contributions into a new Traditional IRA I can open for the client. But even there, the bonds he owns in that Beneficiary IRA have earnings which would have to be estimated based upon the interest received form the bonds and the current value of the bonds. It won’t be exact. Perhaps the IRS would make an exception under the unusual circumstances.
Finally, who is responsible when something like this happens? Is it the advisor? Is it the Brokerage firm? Or is it the clearing house?
Thanks,
Jay
Permalink Submitted by Jose Morales on Thu, 2015-04-09 17:29
To clarify, did the client have a separate Inherited IRA and a regular IRA? If not, did they provide any instructions to open a new regular IRA with the first contribution sent? If the client simply sent in contributions to their inherited IRA then it’s clear that the primary responsibility for the error is theirs. However, an IRA Custodian should never accept a transaction to or from an IRA that is clearly forbidden (and contributions to inherited IRAs are very clearly forbidden). I would consider the contributions excess contributions and go about removing them as such. Since it’s past the tax filing deadline plus extensions for 2012 and 2013 the earnings wouldn’t need to be removed, just the excess contributions with a 6% tax penalty paid for each year the excess was in the account. The withdrawn amounts would not eligible for rollover and I know of know way for the IRS to restore the ability to make contributions for prior years. Perhaps someone else could suggest an angle to use if seeking relief from the IRS.
Permalink Submitted by Alan - IRA critic on Thu, 2015-04-09 17:54
The amounts involved do not warrant the expense, fees and delays resulting from a letter ruling request for relief. I don’t know if any of the parties are going to assume responsibility, or what they could do to reverse the error, but it is clear that the 6% penalty for excess contributions is due for 3 years on Form 5329 with a 1040X for 2012 and 2013. A 5329 will also be needed with the 2014 and 2015 returns. Since the due dates have passed, the amount of the excess contributions with no earnings calculation must be distributed and to avoid tax on the distributions the returns for 2012 and 2013 will have to be amended to eliminate any deduction taken for these contributions. A description of this process is on p 37 of Pub 590 A. There is no statute of limitations for excess contributions. The client will expect reimbursement for the presumed costs from someone.