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Ineligible Roth IRA contributions


J Simmons
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TP and spouse earn too much to make Roth contributions to IRAs, but have for past 7 years. New accountant discovers the problem when preparing their tax return, when they ask about making Roth contributions to IRAs for the 8th tax year. New accountant explains to them that they should not have been making such contributions. TP and spouse want to do whatever is necessary to correct it per IRS guidelines.

Is amending their tax returns to take into account the Roth IRA investment earnings each year as additional taxable income in those 7 years, and putting the balance in a regular investment account (not an IRA of any sort) sufficient correction? Would they need to go back more than 3 years in amending returns to pick up the investment income, given the investment income in any of these years is much, much less than 25% of the reported taxable income?

Do they have early distributions from a "Roth IRA" for those investment earnings, for which Forms 5329 are required?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Seems like there SHOULD be an easy solution: re-characterize as a regular but non-deductible IRA. Is there no basis in the regulations for doing something like that? Total speculation on my part, but it seems to warrant an easy solution because no taxes have been avoided to this point (unless they are beyond 70-1/2 already).

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Thanks, jpod. You have a reasonable response. Surprisingly--not--it seems the IRS sees it differently.

I have been sent an e-mail offline, and it does appear that the excess contributions do have to be reported on Forms 5329 as improper distributions. The e-mailer thinks that a separate Form 5329 is needed for each year, which also seems to be required.

The only question the e-mail seemed not to know was whether the older years are closed per statute of limitations, for this type of matter.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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