Advanced Underwriting Consultants

Question of the Day – March 14

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Here’s the question of the day.

Question: I have a client who contributed to a Roth IRA in 2011, but has actually earned too much to make a contribution.  Can the taxpayer simply apply the 2011 contribution to calendar year 2012—in which she will be eligible to make a Roth contribution—without penalty?

Answer: No.

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 2011 and will be entitled to contribute $1,500 for 2010.  She actually contributed $1,400 in 2011.  $400 is an excess contribution for 2011 and will be subject to the 6% excise tax unless withdrawn prior to April 15, 2012.  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 for 2012, Teri can treat the $400 excess contribution as a 2012 contribution.  That is, as long as her additional contributions for 2012 are less than $1,100 ($1,500 – $400), the $400 excess contribution for 2011 will be treated as a 2012 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.

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.

Question of the Day – March 12

Ask the Experts!

Here’s the question of the day.

Question: My client started a Roth contribution in December of 2011 and completed it in January.  In which year should the conversion be reported on his tax return?

Answer: The Roth conversion is a generally a taxable event in the year the old carrier reports the taxable distribution to the IRS on Form 1099.

In this case, the tax reporting from the old custodian probably would report a taxable distribution in 2011.  The taxpayer, if doing a manual rollover, would have 60 days to complete the conversion with a re-deposit.  Even though the conversion would have been completed in 2012, the taxable event is for calendar year 2011.

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.