Deceased accounholder made impermissible contributions

[Guest Epictetus]

I am administering the estate of my late uncle, who had established an IRA in 1986 and contributed $2,000 to it each year through 1993, when he retired. But he contined to contribute after retiring. His post-retirement contributions were funded by dividend income and Social Security.

Despite minimum distributions, the IRA had accumulated to about $27,000. My mother is the beneficiary. Although she could certainly use the money, we don't want to commence withdrawals until we are satisfied that the amounts withdrawn are properly taxable.

What will happen to this IRA when I present the custodian with this information about improper contributions?

[jevd]

I am administering the estate of my late uncle, who had established an IRA in 1986 and contributed $2,000 to it each year through 1993, when he retired. But he contined to contribute after retiring. His post-retirement contributions were funded by dividend income and Social Security.

Despite minimum distributions, the IRA had accumulated to about $27,000. My mother is the beneficiary. Although she could certainly use the money, we don't want to commence withdrawals until we are satisfied that the amounts withdrawn are properly taxable.

What will happen to this IRA when I present the custodian with this information about improper contributions?

There is a 6% penalty for each year an excess or inneligible contribution remains in the IRA. How many contributions and for how many years have they been in the IRA. It would seem that the IRS should have caught the error through tax filings and forms 5498 reporting contributions with no earned income. Are you sure there was no earned income to justify the contributions?

[Guest mjb]

You need to consult a tax advisor to determine if the estate will have to treat the distributions as taxable under the rule of consistency since a deduction was taken or whether the estate can argue that the rule of consistency does not apply since it is a separate taxpayer from your uncle and statute of limitations for the tax years in which the deduction was taken are now closed which makes the refunds non taxable.

[GBurns]

You did not say when your uncle died and whether or not his final personal return has been filed.

I do not understand why you would be giving any information to the IRA custodian other than a copy of the tax returns and I wonder why that would be necessary? Is the IRA in the estate although your mother is the named beneficiary or did you mean that she is the beneficiary through a will?

If the final return has not been filed as yet, it might be best to make corrections there, so see a tax advisor.

If the final return has been filed and, as mjb suggested, the statute of limitations has run, then you would have a different issue, but again see a tax advisor.

A tax advisor will tell you what is the best approach, either correcting or leaving it alone, but don't go giving stuff when it might not be required.