Ineligible contributions
I have a client that has been living abroad and contributing to a Traditional IRA when he wasn’t allowed to for many years (excluded all earned income with foreign income exclusion). Tax preparer was unaware, so he never took the deductions. Correcting the erroneous contributions, the penalties seem ridiculous for a situation like this. What would you recommend?
Permalink Submitted by Alan - IRA critic on Wed, 2016-04-13 03:58
Without earned income, the contributions are excess whether they were deducted or not. If the client is married filing jointly, see if spouse has earned income which could be used to fund a spousal contribution for client. Lacking that, it should be noted that there is no statute of limitations for excess IRA contributions, meaning that if the IRS matches the 5498 contribution reports against the tax return, they could assess a 6% excise for the accumulated excess contributions for every year. plus interest. Therefore, client should remove the most recent excess contribution with earnings if the due date has not passed, and have to older contributions removed without earnings adjustments. Then file the 5329 and pay the excise taxes starting with the oldest year.