Form 5329 help for tax on excess contributions that carried forward from previous years

Submitted by John Williams on Wed, 2019-09-25 00:38

A Few years ago a large Roth was transferred in error to a TIRA. In amended returns with 5329 and 8606 forms for past years I have been taking the $6500 contribution as nondeductible and paying the 6%. Now for 2018 my excess contribution is reduced to about $2500.
I am unsure what to put on the lines of 5329 and 8606 because I took a distribution of about $3000 from the Tira before end of 2018. The banks 1099r for 2018 shows it as a code 7 normal distribution .I made no other ira contributions.( I assume this limits my options some way). I have not filed my 2018 1040 yet until I can figure out these 2 forms. For 5329, it is lines 10, 11 and 12. that seem to depend on if I include the distribution in my income. Line 9 is easy as it is the $2500 from line 17 for 2017. But what would line 10 be. would my $3000 distribution go on line 11 or 12. It looks like either way line 15 would be $0? Does my withdrawal of the excess but not the earnings change my options and the outcome here?
Confused also on form 8606. Would line 1 be the amount of $2500 excess for 2018 carried over from 2017? After that I understand the rest of the lines, that end with line 15c showing the taxable portion of the $3000 distribution to put on my 1040.

My income will be very low, so I wonder what to do if after I figure my taxes, I did not make enough income to be allowed a $2500 IRA contribution. I assume my $3000 distribution can not be used to refund an ira. I took it out before end of year but 1099r says a normal distribution? So confused, though I do not mind paying income tax if the excess is zeroed out. Please help, and sorry I am not clearer with my questions. Thank you.



Submitted by Alan - IRA critic on Thu, 2019-09-26 02:23

  • Till this year you have been clearing your excess TIRA contribution from 2015 by the process of “absorption” as reported on Form 5329, line 10. In addition to absorption of the excess, another option to reduce the excess is by distribution. The two methods can be used together in any year, and in 2018 you took a TIRA distribution in addition to absorbing some of your remaining excess contribution.
  • The absorbed amount goes on line 10 of Form 5329 and the distribution for which you received a 1099R goes on line 11 or 12 depending on HOW the Roth money was transferred into the TIRA in error. I cannot recall how that happened. This does not make a difference for purposes of eliminating the excess contribution balance, but it DOES matter with respect to Form 8606, and taxation of the 1099R you received.
  • I assume that you reported a distribution of the Roth amount on Form 8606 for 2015. This distribution was probably non taxable as a return of your contributions. I also assume that you did not deduct any of the rollover to the TIRA, since such a disallowed rollover must be treated as an excess regular TIRA contribution. Did you file a 2015 8606 to report the excess contribution as non deductible, adding basis to your TIRA? If so, as that excess is assigned in part in the following years, your TIRA would maintain that basis amount if you did not deduct any of the absorbed contributions.
  • Therefore, the question is how to apply your TIRA basis to the 1099R distribution in 2018. This relates back to the line 11 vs line 12 of Form 5329 for 2018 question. At this point a question –  do you have other TIRA pre tax amounts in addition to the amount erroneously rolled over from the Roth IRA? If not, it will be less complicated to go with line 11 (0 on 12) and just pay pro rated tax on the 3000 distribution. Besides, I expect that Box 2a of the 1099R shows the same amount as Box 1, correct?

Submitted by John Williams on Fri, 2019-09-27 18:48

1. yes I do have other TIRA pretax deposits in addition to the Roth funds transferred in error.2. 1099r box 2a and box 1 are the same.3. 2015 and16 and 17, all amounts reported as  non deductible on 8606.4. I did not take a deduction on the amounts for any years.5 .In my explaination on the2015 amended 1040 I explained it was a Roth transferred as a TIRA in error, but I did not report it on 8606 for 2015.Can I still go with option of line 11 to put the $3000 distribution, reporting it as income, and put 0 on line 12? My first hurdle is line 10 though.  This is last year there is amount left to absorb $2500, which is less than my contribution limit. But I do not understand the instructions for line 10, but your statement seems clear that it is the amount I want to be  absorbed this year, $2500 . or is that not necessarily the case. proceeding with that leaves line 13 at 0, and all lines 14-17 at 0.?IF that is right, what do I put on 8606 lines 1 AND 7?  Does the $2500 I had as remaining excess at start of year function as my contribution for 2018 that line 1 asks for?The next line I do not understand is 7.  Is it simply The $3000 on the 1099 R. Or does my choice made for line 11 and not 12 on 5329, mean line 7 could be a different number, since line 7 should  not include roll overs, or “certain returned contributions”. I do not mind paying the pro rated tax on the $3000 if easier and I have that option. If I get lines 1 and 7 right, even with having other Tira pre tax amounts, I think  I can figure out all the rest of 8606.  I hope it is that simple but suspect it may not ,  since you say HOW the Roth money was transferred into the TIRA in error, DOES matter on form 8606 and the taxation of the $3000 distribution. HOW: While it was a Roth, it was a direct transfer by check made out to 2nd bank for my bennefit., that I delivered. How it got titled as a TIRA is partly my fault and the banks, as bank documents were confusing, and I did not catch the error until after it was transferred to a 3rd bank as a Tira also. Bank 3 who has the money now has no fault, and it  took so long to catch it,so  no banks can fix it. So I have given up that a Bank error can help mitigate here.  So I decided to self disclose and pay the excise tax. But all steps were a custodian to custodian transfer.BTW. I took the distribution by years end to avoid excise tax for 2018, but was not that simple, as I did not remove the earnings, include it in income, or other steps I did not understand. That is only reason having trouble with 8606 at all! I have not filled my 2018 return yet, in case that matters. The banks 1099r says it is normal distribution,. Are there options yet to return the distribution that aren’t more trouble than worth considering the 1099r is already out? I am very grateful for the help on what you next suggest. I may be confusing, so thanks for your patience and knowledge. Sorry this post as one phargraph, but it I bad it in smaller blocks, but post this way anyway.

Submitted by Alan - IRA critic on Fri, 2019-09-27 20:41

  • If you have 2500 left of your 2015 excess at the end of 2017, then line16 of your 2017 5329 should show 2500. That goes on line 9 of the 2018 5329. Hopefully, the prior 5329 forms are correct, since the results carry over to the next year’s 5329. I assume that you are NOT making any other regular TIRA or Roth IRA contributions for 2018. If so, then line 10 is 5500 if you have that much earned income. Line 11 would be 3000, 0 on 12. Line 13 is 8500 and 14-17 are all 0, so your excess is now eliminated and there is no 6% excise due for 2018.
  • Now for Form 8606 – be aware that this is such an odd situation, the IRS instructions are not geared for correcting all aspects of it, so we are improvising to some extent. Since 2018 is the final year of correction, you should be consistent with the prior years you filed. The 8606 deals with your TIRA basis from ND contributions, and the mistaken rollover from Roth was a ND contribution. That said, you have been applying that excess ND contribution since 2015 and you obviously cannot report it for 2015 and again for each year you applied it. The instructions are not clear which years to show it, but it sounds like you did NOT report it on an 8606 for 2015, the year it was initially contributed in error. Instead, you have been reporting it on an 8606 for the years you “absorbed” the excess amount, right?  If so, then follow suit and report the remainder on line 1 for 2018. The remainder is the amount of the incorrect Roth rollover less amounts you have already reported on prior 8606 forms. 
  • The above approach will now be tested with the 1099R distribution you took in 2018 because the 8606 will apply some basis to that distribution, making part of it non taxable. 
  • Yes, the distribution complicates things, but it is too late to roll it back now. It appears that you did not need it to eliminate the last of the excess amount, but you will have to report it on your 2018 return. You will end up with basis in your TIRA (combined across all TIRA accounts you own), which will make any future distributions partly tax free.

Submitted by John Williams on Tue, 2019-10-01 21:40

Hello,I may not fully appreciate the issue you raise of how and if I reported the Roth distribution each year.  The bank in 2015 did not report any distrbution of a Roth on a 1099R. The Roth was over ten years old and I was over 60 years old at the time., so no tax would have been due to report.  So the “reporting” I did was to include a detailed explaination of the transfer error and the full 2115 transfer amount, and my plan to carry it forward each year until it was absorbed. For this year it will be all absorbed, and I will be consistant by including the explaination again. With 2018, the entire amount has been absorbed as ND contributions with the Tira basis established on 8606. So 2018 seems consistant with previous years.Do you think there is anything I should add or do differently for 2018?  And just leave 2015-17 as sent?  Any questions they will likely have on accepting this?Thank you for the help and interest in my problem. 

Submitted by Alan - IRA critic on Wed, 2019-10-02 02:08

  • Most likely the bank did not report the Roth distribution in 2015 because they coded it as a non reportable transfer to another Roth IRA, but that turned out to be a TIRA instead.  Don’t know if the TIRA custodian issued a 5498 reporting receipt of a rollover, but probably didn’t. Since your Roth was qualified at the time and reporting the Roth distribution has no bearing on the resolution of this problem, no action is recommended now.  2015 is also a closed tax year.
  • Since this is a rare and unique situation there is no particular template for curing it. Ask 10 people at the IRS how to resolve this and you probably get about 5 different answers. Therefore, if the IRS has not contacted you yet with respect to the filing of these 5329 forms for past years, just follow through to the end in 2018 as you have been doing, then hope you do not hear anything further.

Submitted by John Williams on Tue, 2019-10-22 16:53

For me tax year2015 closed in October 2019 with my extension.  Not sure what the statute of limitations would be now  since I owed money on form 5329 to pay excise tax on excess contributions, that I attached to the amended 1040. Usually amending a return does not extend the Statute of limitations, but what about the form 5329, does it have its own SOL from date it was filed? Does the  2015 form 1040 return have an extended date, or is that indeed a closed tax year?  BTW, I filed the amended 1040 almost a year before the SOL date, so the 60 day rule not apply to the 1040. 

Submitted by Alan - IRA critic on Tue, 2019-10-22 17:01

Yes, it does have it’s own SOL. Filing a 5329 is the only way to start the SOL running on excess contributions, missed RMDs etc.  2015 is a closed tax year with respect to filing for a refund, but not for excess contribution excise tax purposes. Not positive, but I think if you filed a 1040X for a refund for a closed year, but also attached a 5329 to it with respect to an excess contribution, the IRS would still accept the 5329, since it is itself treated as a return.

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