Changing Roth contribution year.
My clients contributed to a ROTH IRA on 12/30/13. It turns out they made too much money to contribute in 2013. They are, however, eligible for 2014. What needs to be done to correct the account? Thanks!
My clients contributed to a ROTH IRA on 12/30/13. It turns out they made too much money to contribute in 2013. They are, however, eligible for 2014. What needs to be done to correct the account? Thanks!
Permalink Submitted by Alan - IRA critic on Wed, 2015-07-29 21:35
Passing of deadlines has eliminated the easy fixes. Client would now owe the 6% excise tax for 2013 (Form 5329 and 1040X). Then for 2014, if they were eligible for a regular Roth contribution in 2014 that they did not make, filing the 2014 5329 will result in the excess from 2013 being applied as a 2014 contribution and there would be no additional excise tax for 2014.
Permalink Submitted by Ronald Birnbaum on Thu, 2015-07-30 11:02
The 6% excise tax is taxed on earnings from 2013? They contributed on the last day of 2013 so there wasn’t any earnings in 2013. In 2014 they were eligible. So what info goes on Form 5329? THanks.
Permalink Submitted by Ronald Birnbaum on Thu, 2015-07-30 14:26
Actually the 6% excise tax seems to be on the entire contribution, not the earnings. Do they have to anything with the earnings? The 5329 form seems to put a 6% tax on their 2013 contribution – but doesn’t say if they can leave the contribution in the account or not. Seems to me since they can make the contribution for 2014 and the earnings are all part of 2014 and do not need adjusting. The contribution itself is also going to be for 2014 so they can leave those funds in the account, too – but they still owe the 6% penalty on the entire 2013 contribution that turned into a 2014 contribution! Does this make any sense? Thanks again!
Permalink Submitted by Alan - IRA critic on Thu, 2015-07-30 18:25
Yes, you have it. When the 6% excise tax is paid, the earnings stay in the Roth. In this case the 2013 excess contribution is being applied on Form 5329 to the 2014 year. This is done without contacting the Roth custodian who has reported a 2013 contribution. The 5329 filed by the client for 2014 will tell the IRS that the prior excess contribution from the 2013 5329 has been applied to the 2014 year. Nothing is withdrawn from the Roth account. Of course, the client must be eligible for that Roth contribution for 2014 in order to be able to apply the 2013 contribution to 2014.