Contributions to in correct IRA type
I have a client that has contributed to his Roth IRA since 2011 through payroll withholding but was always over the income limit to contribute. To make matters worse, the year I took him on as a client, he told me that he made the contributions to his traditional IRA and I deducted $6500 for 2013-2015.
I was wondering if there is any avenue to recharacterize the previous years Roth contributions to the TIRA since we already took the TIRA deduction? Can the investment company just change the IRA account from a Roth to a Traditional?
I guess the only other option would be complete the 5329s for all the years, pay the 6% penalty and then amend 2013-2015 to show no IRA deduction? Will the IRS abate the 6% penalty based on the fact that he relied on the advice of the investment adviser at his employer?
Any help would be greatly appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2017-09-08 00:50
Unfortunately, client owes the 6% excise taxes for the Roth contributions starting in 2013 including accumulated excess amounts for 2014 and 2015. Form 5329 automatically applies the excess balance to any Roth IRA distributions taken since 2014 or to any Roth contribution eligibility in succeeding years that client did not use. I assume that client was also not eligible for Roth contributions in 2016 and 2017, so that would eliminate applying any of the accumulated excess amounts to 2016 or 2017. If the accumulated excess amount is distributed (just the excess, no earnings) before year end, there will be no excise tax due for 2017. There is no procedure for requesting waiver of the 6% excise tax for excess contributions. Of course, if client had given you the correct info regarding the type of contributions that were made, this would not have spun out of control, OR if the IRS had any viable contribution monitoring from the 5498 forms and tax returns that were filed, they also would have notified client of these excess contributions in time to remove them or recharacterize. So client is the victim of an ugly combination of events which included his own errors. Finally, there is no statute of limitations for excess IRA contributions, as there is for claiming an unwarranted IRA deduction, so I guess the 2013 deduction can stand. The investment company cannot change anything now, but if they made an error that the client did not contribute to the client may have a case against them for damages.
Permalink Submitted by MATTHEW STEVANS on Fri, 2017-09-08 13:18
Thank you Sir for your quick response. I assume the 5329 Excess contribution penalty will start with 2011 and going forward? I will let you know how the penalty abatement response turns out. I may even take it to the appeals level just to see what happens.