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Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2045
Experience:  Certified Public Accountant
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My brother just learned that he has been making too much

Customer Question

My brother just learned that he has been making too much income to contribute to a Roth IRA. This has been going on for eight years. How does he correct this? Thank you
JA: The accountant will know how to help. Please tell me more, so we can help you best.
Customer: Joint tax return. AGI in excess of $191,000 every year. They have been making ROTH Ira contributions but were not allowed because of the income. How to fix this now?
JA: Is there anything else important you think the accountant should know?
Customer: No. That's it
Submitted: 8 months ago.
Category: Tax
Expert:  Mark Taylor replied 8 months ago.

Hi, my name is Mark. I will be happy to help you. Please give me a moment to prepare your response.

Expert:  Mark Taylor replied 8 months ago.

There is a 6% penalty on excess contributions. Please give me a few moments I am reviewing a few things.

Expert:  Mark Taylor replied 8 months ago.

How much did he contribute each year. Is he covered by a retirement plan with his employer? If he leaves the money in the account he is going to pay a 6% penalty per year. Let's assume he contributed $5,000 per year. He would need to amend 2013 return to include form 5329 and include the excess contribution of $5,000. The 6% penalty is $300. In 2014 now the excess contribution amount is $10000 so the penalty is $600. In 2015 the excess contribution is now $15,000 and the penalty is $900.

Expert:  Mark Taylor replied 8 months ago.

An alternative option would be distribute the funds. There would be tax on the earnings of the account. If your brother is under 59 1/2 there would be a 10% penalty.

Customer: replied 8 months ago.
Does he need to take the money out and pay tax on the earnings to resolve this for future years?
Expert:  Mark Taylor replied 8 months ago.

Leaving the amount in the plan is not the best option as the cumulative excess contribution would be penalized 6% each year.

Customer: replied 8 months ago.
What if he takes it out and never amends to pay the back penalties? If the IRS inquires, is the damage worse if he doesn't fix it proactively?
Expert:  Mark Taylor replied 8 months ago.

There is a three-year statute of limitation to assess taxes on Form 1040. This would begin once the return is filed. Form 5329 is used to report the penalty associated with excess contributions to an IRA account. This would be considered an excise tax. If Form 5329 was filed with the return then the 3 year statute for this return would begin then. If it was not filed then the statute would remain open.

Assuming that he contributed $5,000 each year the combined penalty would be close to $10,000. If your brother liquidates the account and pays any taxes on the earning the risk is that the statute of limitations remains open for these year. So he would be responsible for the penalty and interest associated with the excise tax (if the IRS catches the over contribution).

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