IRA contribution when income over a threshold
Hello,
I have a client who contributed to his traditional ira proactively for 2017, but later found out that his income is more than what’s permitted if his spouse has a 401k at her company for deduction.
what can be done with the contribution that shouldn’t have been made?
1. can we call the custodian to change registration to non-deductible ira?
2. do we just call the company and ask to distribute?
Thank you so much.
Permalink Submitted by Alan - IRA critic on Fri, 2018-06-01 18:13
The client has choices. They can just report a non deductible contribution on their 2017 return and file Form 8606 to report it. The custodian does not need to be contacted if they do that, but the client may not want to have TIRA basis to track for years from the non deductible contribution. The income limit is the same for a Roth contribution in this situation so the contribution cannot be recharacterized as a Roth contribution, however the custodian can be requested to return the TIRA contribution with allocated earnings. Assuming they filed their 2017 return on time or filed an extension, they have until 10/15/2018 to request the return of the 2017 contribution. If they do that, any earnings on the contribution must be reported as income on the 2017 return, which would result in an amended return to report the earnings and the 10% penalty will apply to the earnings if IRA owner is under 59.5.