Have a Tax Question? Ask a Tax Expert
However - assuming that was a honest mistake - you may ask the IRS to abate penalties - - the best path forward might be to ask the IRS to abate penalties.File a form 843 - http://www.irs.gov/pub/irs-pdf/f843.pdf to request the "accuracy related penalty" be abate based on reasonable cause - so be careful when prepare an abatement request. Here are instructions - http://www.irs.gov/pub/irs-pdf/i843.pdf
If the IRS agrees to abate penalties - the part of your issue would be resolved.
Let me know if you need any help.
I have been told by the broker that they do not calculate the earnings and I should ask a tax advisor. Are the earnings simply the fair market value of the account on the day the excess contribution was deposited minus the fair market value of the account the day the excess was withdrawn? Also, see the following:
"A return of excess contributions is not required if you are correcting the excess contributions to subsequent years"
Why can't I correct the excess of 2010 to 2011 by notifying the broker it is to be redirected to 2011 before the 2011 filing deadline and then because it is considered excess in 2011 also, then request a withdrawal before the 2011 filing deadline?
I have been told by the broker that they do not calculate the earnings and I should ask a tax advisor. Are the earnings simply the fair market value of the account on the day the excess contribution was deposited minus the fair market value of the account the day the excess was withdrawn?
According to the IRS publication 590 - www.irs.gov/pub/irs-pdf/p590.pdf - In most cases, the net income you must withdraw is determined by the IRA trustee or custodian.
I never saw the broker who refused to help with such determination - that might be the time to move your assets to a different broker.
If you need to determine the applicable net income on IRA contributions use Worksheet 1-4. Determining the Amount of Net Income Due To an IRA Contribution and Total Amount To Be Withdrawn From the IRA (that is from IRS publication 590)
Also, see the following:
That could be done if the contribution for 2010 was made between Jan 1 2011 and Apr 15 2011 - in this case your contribution might be recharacterized. Because your contribution was made before Jan 1, 2011 - it may not be treated as for 2011. It technically must be distributed first.
You originally wrote "Made a contribution to Roth IRA in 2010 of $5000" - so based on your updated information the contribution was made in 2011 for 2010.
In this case - you are eligible to recharacterize.
For recharacterization should be done via your broker.
You need to inform your broker about your intention to recharacterize.
There are might be some paperwork needed based on your broker's requirements.
According to the IRS - see publication 590 that I referenced above: How Do You Recharacterize a Contribution?
To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.
The type and amount of the contribution to the first IRA that is to be recharacterized.
The date on which the contribution was made to the first IRA and the year for which it was made.
A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.
The name of the trustee of the first IRA and the name of the trustee of the second IRA.
Any additional information needed to make the transfer.