2015 Roth IRA Recharacterization

Submitted by MIKE KRUCHTEN on Sat, 2017-04-15 12:05

Client made a 2015 Roth IRA contribution of $6,500 but her MAGI to high therefore would be considered an excess contribution. She never removed contribution until this week. I don’t believe her CPA placed contribution on 2015 tax return since MAGI was to high. The IRA custodian couldn’t recharacterize 2015 contribution , too late according to them. However, IRA Custodian has form to allow client to carryover excess to future tax year(2017) but they don’t report to IRS. Her income in 2017 will allow for a Roth IRA contribution. Client must file IRS FORM 5329.

My questions are;

What is her deadline to file Form 5329 for 2016? She already filed taxes for 2016 so assume she would need to amend by 10/15/17 to avoid 2016 excess contribution penalty?

Client’s taxes have been filed for 2016 but CPA unaware she never removed 2015 Roth IRA contribution, should she be filing the 5329 for 2016 or when she files her taxes in 2017 since the contribution will be a carryover for 2017? She has already made a 2016 Trad IRA contribution due to excess MAGI.

I think she could remove the 2015 excess contribution before 2016 tax deadline to save the 2016 6% excess penalty. She has done this via IRA Custodian paperwork but they won’t report the carryover to 2017 to IRS since to much time has passed. It’s a very large and reputable MF company so assume they are correct in their non reporting of carryover to 2017.

I think she will have the excess penalty for 2015 only since she is fixing in 2016 but contribution going to 2017 so questioning the reporting of this?

The contribution of $5,500 has grown to $10,000. Still in awe the IRS doesn’t tax her or penalize on the NIA amount but all my readings support no tax/penalty on NIA but let me know if I’m missing something?



Submitted by Alan - IRA critic on Sat, 2017-04-15 15:55

  • With an excess contribution not corrected by the due date, Form 5329 must be filed every year. Since these forms are cumulative the client must first file a 5329 for 2015 showing the 6% excise tax. Apparently, the client made their max TIRA contribution for 2016 because the Roth excess from 2015 could not be applied to 2016 on Form 5329. Therefore, the 2016 will report another 6% excise tax for 2016. Both of these 5329 forms can be sent in together in about two weeks, usually without a 1040X. There is a slight chance the IRS will ask for a 1040X before accepting the forms. There is also a chance the IRS could bill late interest for late payment of these two excise taxes.
  • Client could withdraw 6500 anytime before the end of this year, file a 2017 8606 to report the income tax (no tax since this is a return of a regular contribution) and a 2017 which will show the distribution eliminating the excess contribution. There is no excise tax for 2017, but this will not eliminate the excise tax for 2016. The distribution would have had to occur by 12/31/2016 for the 2016 excise tax to be eliminated. Note that this eliminates the option to carry over the excess to 2017. The choice is either a distribution or assignment to 2017. If client wants to assign the excess to 2017, the withdrawal should not be taken.
  • It is not clear exactly what she filed with the MF company.  If client wants to assign the excess to 2017, she does not ask the MF company to do anything, and the assignment is reported solely on the 2017 5329 line 19. Perhaps the paperwork being processed is to withdraw the 6500 which would be a reported distribution for 2017 that would also end the excess contribution (report on line 20 of 5329), and then then the MF company uses this money to make a new contribution for 2017. Either way will work to end the excise tax at the end of 2016. But the reporting differs a little depending on which of these two methods is being used.  Reporting is easier to just assign the excess to 2017 since this can be reported solely on Form 5329 without any involvement with the custodian and with no distribution to process or report on Form 8606. But either method will work to limit the excise taxes to 2015 and 2016.
  • You are correct that once the excise tax has been incurred, the earnings remain in the Roth and only the actual contribution amount is withdrawn or assigned to a later year. Excise tax and earnings removal or mutually exclusive. If the earnings estimate is correct (?), it was actually beneficial not to correct this before the deadline because the excise taxes due are probably less than the income tax on removal of the earnings plus 10% penalty if under 59.5. 

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