Excess IRA Contributions, Company Plans, Roth Conversion Conversation Highlights Mailbag

By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag includes questions on excess IRA contributions, company plan rules and the Roth IRA conversion conversation. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Dear Ed,

If a person makes contributions to an IRA then realizes they are over the income level to get a tax deduction, can they remove those contributions plus income if they haven’t filed their tax return for the year of the contributions?

Situation: $4,800 was contributed to an IRA in 2011. I am extending my tax filing so I have not filed Form 8606 for 2011. I filed the IRS Form 5498 showing the contributions.

If I can remove the contributions, what steps do I need to take?

Thanks for your help.

Rita

Answer:
You have until October 15, 2012 to remove the $4,800 plus income as an excess contribution. The income will be taxed for 2011 (the year in which the deposit was made) and thus should be reported on your 2011 tax return. Another option is recharacterize (change) the $4,800 to a Roth IRA contribution for 2011, if your income is within certain limits. IRS Publication 590 shows how to remove or recharacterize the contribution plus income. You can find it at www.irs.gov; on the left hand side of the screen click on Forms and Publications.

2.

Dear Mr. Slott:

I have a 457(b) plan from a private university where I was previously employed.

I have to make an irrevocable decision on distributions – 30 year fixed vs. Minimum Distributions and the latter is much more favorable in regards to heirs.

However it not clear from what I have be able to gather if the MDO in such a plan can be stretched to my children as beneficiaries after my wife’s death / my death. Also can I exercise disclaiming the inherited 457(b) plan to pass onto my children at their life expectancy?

Thank you for any help you can provide on this matter.

Sincerely,

Fred Petry

Answer:
As long as you leave your funds in the 457(b) plan, you and your beneficiaries will be limited by whatever options the plan offers. They will be outlined in the Summary Plan Description for your plan. While the tax code allows for a disclaimer of assets at death, again, it is up to the terms of the plan to allow the use of a disclaimer.

3.

I’m 70 and my wife is 67. I have a SEP IRA in my name with a value of $55,000 and a rollover IRA with a value of $750,000. My wife has both a rollover IRA and a traditional IRA with a $160,000 in each. At our ages does it make sense to convert any of these to a Roth IRA? Our combined income from Social Security and dividends and interest is approximately $70,000. We can pay the taxes from our after-tax account.

Thanks,

Jim

Answer:
Basically, you must decide whether the future tax benefits of the Roth IRA (i.e., tax-free distributions) are greater than the cost of paying taxes on the conversion.

Generally, a conversion may be beneficial for IRA owners if your marginal tax rates are likely to be higher when you withdraw the money, because Roth IRA distributions would be tax-free. Having non-retirement plan funds to pay the taxes is beneficial because you and your wife won’t deplete your IRAs to pay the income taxes on the conversion. Also, you would be leaving the Roth funds to your beneficiaries tax-free.

The decision whether or not to convert depends on many factors and should be addressed by a competent advisor.