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TAX question: I need the answer to a very specific question…

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TAX question: I need the...
TAX question: I need the answer to a very specific question about Roth IRAs. I am a tax preparer. I have a client who made a Roth IRA contribution in 2017 for 2016. It turns out, his income was too high to be eligible for the Roth contribution. If he applies the contribution to 2017 (assuming he will meet the AGI limits this year), can he avoid the 6% penalty, since he would have been eligible to make the Roth contribution in 2017 for 2017?
Submitted: 8 months ago.Category: Tax
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Answered in 1 hour by:
9/30/2017
Tax Professional: Barbara, Enrolled Agent replied 8 months ago
Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,183
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

"Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:

Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed? ), plus

Any excess contributions for the preceding year, reduced by the total of:

Any distributions out of your Roth IRAs for the year, plus

Your contribution limit for the year minus your contributions to all your IRAs for the year.

Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

If your client timely filed his 2016 tax return without withdrawing a contribution that he made, he can still have the contribution returned to him within 6 months of the due date of your 2016 tax return, excluding extensions. If he does, file an amended return with “Filed pursuant to section(###) ###-####2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.

Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year."

https://www.irs.gov/publications/p590a#en_US_2015_publink1000231024

Please let me know if I can assist you further.

Thank you and best regards,

Barb

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Customer reply replied 8 months ago
Hello,My question is very specific. Since he made the contribution in 2017 for 2016, if he reapplies it now for 2017, does he have to pay the 6% tax? Assume that his income is such that he is allowed to make the full contribution for 2016 and that because he has filed an extension, he still has time to make that reallocation. Can you answer that question?
Tax Professional: Barbara, Enrolled Agent replied 8 months ago

I apologize if my answer was not clear.

The excess contribution and any earnings must be withdrawn within six months of April 18, 2017, or October 16, 2017 if he filed for an extension.

The 2016 return must be amended and the language "Filed pursuant to section(###) ###-####2" written at the top of the 1040X.

He can then make the contribution in 2017 for 2017.

There will then be no 6% penalty.

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Customer reply replied 8 months ago
He cannot simply call the fund manager and ask that it be reapplied for 2017?
Customer reply replied 8 months ago
That's the gist of my question. Without withdrawing the funds, he would like to apply them to a 2017 Roth instead of a 2016. I am pretty sure he can do that. My question was more, since he would be allowed to make a 2017 contribution in 2017, isn't it penalty-free to make such a switch, assuming all other conditions apply.
Customer reply replied 8 months ago
Is there anything you can ask me to help clarify my question. We seem to be talking at cross purposes. Are you telling me that there is no way to simply leave the contribution in place and apply it to 2017 instead of 2016? The various investor blogs I have looked at seem to that it's pretty easy. So, maybe I am not being clear. Please respond or I will try to find another expert to answer my question. Thanks
Customer reply replied 8 months ago
I actually need the answer to this question. So, please let me know that you are still working on it. If you aren't, I will ask someone else. It really seems unfair that you absolutely did not answer my question even though I tried to make it really specitfic and now, because you are "answering" it, I can't ask anyone else.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 8 months ago
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,067
Experience: 35 years tax experience, including four years at a Big 4 firm.
Verified

I'mCustomer I see you requested another tax pro. You received good advice, but you are looking for confirmation that your IRA custodian can switch the clarification to save the penalty.

Most IRA custodians will not make the administrative change you requested. Some might. But you can't force that change unless your client actually made a 2017 contribution and they made an error you can prove.

I have had both responses when trying to repair IRA errors. The previous expert gave you the timeline to fix things through IRS, but you seemed to ask about the IRS custod***** *****ging their records, which is not something you can force.

I hope this answer guides your next step, which is to try and get the transaction reclassified. Difficult to do once the contribution is recorded and reported to IRS as a 2016 contribution.

Thanks for asking at just answer. Positive feedback is appreciated after review. My answer was intended to redirect your energies away from tax advice and instead to the custodian.

Customer/p>
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