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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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1. Made a contribution to Roth IRA in 2010 of $5000. Just

Resolved Question:

1. Made a contribution to Roth IRA in 2010 of $5000. Just realized today(3/31/2012) that this was excess contributions due to 2010 AGI of over $176,000 (married filing joint) and my 2011 AGI is also too high for an allowable contribution.

2. I have amended 2010 Form 1040 to refect a 6% penalty for excess contributions.

3. Can I withdraw the 2010 excess contributions before the 2011 filing deadline (April 17, 2012) and avoid the penalty for 2011 or did I need to do that before 12/31/2011?

4. Do I notify my broker now that I wish to withdraw the excess contributions on a Distribution Request Form?

5. If I have 2010 and 2011 capital gains in the Roth account for stocks purchased prior to 2010 do I have to report those due to the 2010 excess contributions?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
3. Can I withdraw the 2010 excess contributions before the 2011 filing deadline (April 17, 2012) and avoid the penalty for 2011 or did I need to do that before 12/31/2011?
To avoid penalties for 2011 the distribution should be done before Dec 31 2011.
Since your distribution is after that date excess contribution penalty is in effect.
You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The distribution by the due date of the return would allow to avoid penalties only for the year for which contribution was made - not for following years..
4. Do I notify my broker now that I wish to withdraw the excess contributions on a Distribution Request Form?
Yes - you need to notify your broker and ask to distribute the amount of excess contribution and all earnings. The broker will determine the amount of earnings.
5. If I have 2010 and 2011 capital gains in the Roth account for stocks purchased prior to 2010 do I have to report those due to the 2010 excess contributions?
Your broker will determine the amount of earnings attributable to excess contribution that you need to withdraw.

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.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience: Taxes, Immigration, Labor Relations
Lev and 4 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
What year are the eanings that the broker determines taxable?
Customer: replied 2 years ago.
what tax year will the earnings be reported
Expert:  Lev replied 2 years ago.
The broker will determine the amount of earning attributable to your excess contribution.
That amount will be included into your taxable income in the year of distribution.
If you will take distribution now - you will receive form 1099-R - http://www.irs.gov/pub/irs-pdf/f1099r.pdf.
The taxable amount will be reported in box 2A.
You will report that income on your 2012 tax return.
Customer: replied 2 years ago.

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?

Expert:  Lev replied 2 years ago.

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)

1.Enter the amount of your IRA contribution for 2010 to be returned to you1.
2.Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterization made while the contribution was in the IRA 2.
3.Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterization made while the contribution was in the IRA 3.
4.Subtract line 3 from line 24.
5.Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places)5.
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned6.
7.Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you7.

 

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?

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.

 

Customer: replied 2 years ago.
I made the contribution 2/24/2011 for 2010. How do I recharacterized?
Expert:  Lev replied 2 years ago.

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.

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