Advanced Underwriting Consultants

Question of the Day – April 5

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  My client made an excess deductible contribution of $10,000 to her IRA in 2010.  What does she need to do to fix it?

Answer:  There are two issues for the client to address.  First, since the client incorrectly claimed a deduction on her 2010 income tax return for the IRA contribution, that year’s tax return must be amended.  The client must pay any additional tax (plus interest and penalties) that might be due.

Second, since the overall IRA contribution was in excess of the amount allowed for 2010—deductible or not—the client should remove the excess contribution and file Form 5329 to report and pay the penalty tax due.  The penalty tax is 6% of the amount of the excess contribution for each year it remains in the IRA.

It is possible to apply an excess contribution from an earlier year to the current year without taking a distribution.  This method allows the taxpayer to avoid making a distribution, but it does not avoid the 6% tax on excess contributions remaining at the end of the year and reduces the maximum contribution for the current year.

Here’s an example adapted from Publication 590:

Teri was entitled to contribute $1,000 to an IRA in 2012 and will be entitled to contribute $1,500 for 2013.  She actually contributed $1,400 in 2012.  $400 is an excess contribution for 2011 and will be subject to the 6% excise tax unless withdrawn prior to April 15, 2013.  Teri chooses not to make a withdrawal, and therefore owes an excise tax of $24 for the excess contribution.  In order to avoid the 6% penalty tax being assessed again for 2013, Teri can treat the $400 excess contribution as a 2013 contribution.  That is, as long as her additional contributions for 2013 are less than $1,100 ($1,500 – $400), the $400 excess contribution for 2012 will be treated as a 2013 contribution and she will not have to take a withdrawal.

If a taxpayer does not make a corrective distribution, a 6% penalty tax will be imposed on the excessive amount, for the current year and for every subsequent year, until the excess contribution is eliminated.  The penalty tax is reported and calculated on Form 5329.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.