I contributed too much to my roth IRA in 2006 and 2007. I removed the excess plus earnings. I am trying to figure out how to address with IRS forms. I removed the 2006 after I had already filed my taxes. I got the 1099-Rs this year. I have received the 2007 dollar amounts, but the 1099's won't come until next January.

I was thinking that I need an amended 1040 for 2006 and a 5329 for 10% penalty.

For 2007, would I send the 1099's I have received, and also include the 2007 dollar amounts.

Thanks for reading this.

If you removed your 2006 excess plus earnings after you filed but prior to 10/15/07, you are correct that an amended return will be needed and a 5329 for 2006. .

For the 2007 excess, you already have the figures that can be included on your 2007 return, and the IRS also advises attaching an explanatory statement of what transpired in correcting the excess contribution. If you do that, you can ignore the 1099R when it comes out next January. You do not send the 1099R forms, as the IRS already has them.

Alan,

I have contributed to ROTH IRA 2006 on March 2007 and I just realized two days back that I am not eligible for contribution as my AGI for 2006 was greater that 160,000. It was mistake on my part understanding the rule. I was under the impression that taxable income must be less that 160,000.

So what are the options I have to correct this mistake? Is it possible to recharecterize ROTH contribution as non deductible IRA for 2007?

Any help is greatly appreciated.


Thanks
Sreedhar

It's too late to recharacterize a 2006 IRA contribution. The deadline was 10/15/2007 to do that.

You incurred a 6% excise tax effective 12/31/06 as soon as the deadline passed. You could report this on a stand alone 5329 for 2006 without a full amended return. Worse news is that another 6% excise tax on the contributed amount was incurred effective 12/31/07 and a 5329 should be added to your 2007 return to report the tax.

HOWEVER, if by chance you WERE eligible for a contribution in 2007 and did not make one, the 5329 will apply the excess as a 2007 contribution and you would not owe the penalty for 2007.

If there is any good news it is that any earnings from this excess contribution can stay in the Roth because incurring the 6% tax relieves you of pulling the earnings out. If you cannot apply the contribution to 2007, perhaps you can for 2008. You do not incur another penalty now until 12/31/08, although the IRS will probably bill interest on these penalties. The point is that you could correct the excess as late as this coming December to avoid another penalty and any earnings will stay in the Roth. The IRS will probably lower the interest rate to reflect the Fed rate reductions as the year goes by. That's your call as to when you correct it.

When you DO decide to withdraw the excess, do NOT bother to explain all this to the IRA custodian because they will be coding this as an early Roth distribution, NOT a correction. YOU are the one that reports the correction on Form 5329 and on Form 8606 for the year the contribution is returned. It will not be taxable because as a Roth you were not able to deduct it.

Finally, before doing any of this, be sure you have to. Modified AGI is different than AGI. For example, if you had a Roth conversion, it is included in AGI but NOT in modified AGI. See PUb 590, p 60.

Thanks Alan.

I don’t qualify for 2007 contribution, so I can’t avoid the 6% excess tax for 2007. I will do the same as suggested by you. First I will report 5329 stand alone for 2006 and 2007 return along with 5329.

What exactly I should report for 2008 if I distribute 2006 ROTH IRA contributions before 12/31/08? Is it only 2008 return and 8606 or Do I have to report 5329 also?

I did the same contribution for my wife too. Is it the same procedure for her to correct the mistake?

Thanks in advance.
Sreedhar

Yes, same procedure for your spouse. Both the 5329 and the 8606 forms are individual forms, ie they contain only the SSN of the taxpayer who owns the retirement account, even though you are filing jointly. So you will each need to attach

For 2008 return (filed a year from now), you would each need an 8606, Part III, but the taxable amount should be -0- on line 25. You would also each need a 5329, Part IV, on which you will show the excess amount you brought into 2008 and your distribution done this year. When you subtract the distribution, you end up showing -0- remaining excess contribution, so there will be no penalty. This is the final 5329 showing that you have corrected the excess contribution.

Again, you might want to wait until late in the year to correct this because Roth earnings on the excess contributions get to stay in the Roth tax free. But you should pay the 06 excise tax ASAP to stop interest from accruing. The IRS may or may not bother to bill interest, but once you pay the 6%, interest stops accruing.

I made a full $4000 2007 Roth contribution in Jan. 2007. My income turned out to allow a contibution of only $1200. My custodian has returned $2800 plus $261 of earnings today (March 08). Pub 590 seems clear:

"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."

The instructions for Form 8606 have an example similar to mine, except that the excess+earnings were returned during 2007. For that case, it says that no 8606 needs to be filed, the excess+earnings are reported on Form 1040 line 15a, and the earnings on line 15b. The 10% penalty for early distribution of the earnings is reported on line 60. And that a statement explaining the distribution is to be attached. No mention is made of needing to file Form 5329.

The instructions for Form 5329 (line 15) seem to indicate that 5329 should also be filed.

Does 5329 also need to be filed? And does any of this change in my situation because the return was after 1/1/2008? Will I need to explain this again on my 2008 return (because I assume my custodian will give me a 2008 1099 showing a distribution during 2008)?

You will not need to explain it again on your 08 return. That's why the IRS wants the explanatory statement attached to your 07 return. They are then supposed to match your statement up to the 1099R that comes out next January that codes the activity to your 07 return only.

The 5329 does not need to be filed unless you need to correct or change the 1099R coding in Box 7. This will be an early distribution of earnings and since you WILL owe the 10% penalty on the earnings, just entering the penalty on line 60 of Form 1040 will do the job.

Not to over complicate this, but when you are in the Roth "phaseout range" like this, the extra earnings that go on your return (line 15b) may create a new smaller excess amount of your contribution, ie a sort of vicious circle of smaller excess contributions. You or your preparer will probably run into this situation because of the $261. Perhaps your custodian is aware of this and adjusted the return to allow for it. If not, and you do not want to go back for another small return of excess contributions, you WILL need a 5329 to report the excise tax of 6% on the very small amount you will leave in there. The choice of how to deal with this may well depend on whether you will be eligible for a 2008 Roth contribution. If so, you can apply the small excess to your 08 contribution to retire the excess amount on a 2008 5329. If you do NOT expect to qualify for 08, then it may be best to have another excess amount returned right away so you can put this to bed with your current return.

Thanks Alan, I had not thought of that. God willing, I will not be eligible for a Roth contribution in 2008. I will call my custodian tomorrow and ask them exactly how they did their calculation.

More than likely they did their calculation under the IRS guidelines in the att'd link (TD 9056). Unfortuneately, these guidelines are fine for those over or under the income phaseout range, but they do not address the phaseout range taxpayer like yourself.

But before making this into a major problem, why not try adding that $261 of income to your tax return to see if you come up with a remaining excess contribution or not.

[www.irs.gov]

Using my initial MAGI, my allowed Roth contribution was $1200.

Including the returned $261 of income from the $2800 I had returned, my allowed contribution goes down to $1140. If I ask for another $60 back, which should come with $6 earnings using the ratio of 60 * 261/2800, and add the $6 income and calculate again, I'm still at $1140 allowed.

I think I'll ask for $100 back just to be safe. Thanks again.

In 2007, I made a $5K contribution to both my and my wife's Roth IRA's. However, I forgot that I had no earned income, our income is from retirement.

last month I made withdrawals from both accounts and one had a gain ($5K+) and one had a loss ($5K-). We are both over 59 1/2.

1) I use Turbo Tax and in looking at the fields that have to be filled in on the 1099, I have a few questions. Is 2a and 3 the same value for the gain (taxable amount & capital gain). For the loss, would 2a be zero and 3 be the loss ?

2)should the code in 7a be - 7 (normal distribution) or 8 (Return of contribution taxable in 2007). Why is there a 7a and 7b ?

3)I have seen some comments about an explanatory comment; where would that be entered if I use TT and I e-file ?

Thanks for any help,
Terry

I don't use TTax so cannot be specific about it.
However, Box 3 does not apply to IRAs at all. Box 7 carries a distribution code, which should be #8. You should only be taxed on the earnings from the one account, and you cannot net that against the loss in the other. No penalty applies to the earnings since you are over 59.5. You may have to experiment with 2a to get that result, but the positive earnings should probably go in there. Remember to totally separate these forms, one for each SSN.

Box 7b shows whether the account is an IRA or not because there are different rules for employer retirement plans relative to application of the distribution code. In your case, the box should be checked since this is an IRA.

But you don't have the 1099R yet, so I guess you are anticipating how it will look for entry purposes. Since you received the amount with the earnings adjustment, it appears the custodian understood you were correcting an excess contribution, so the code of 8 should be on your 1099R next January.

3) There should be a place for the explanation in TTax to permit you to complete this and e file.

Next January when the 1099R comes in, you can ignore it if it agrees with what you did and it should.

Thanks Alan,
Just a couple more.

The code 8 on line 7, does that go in 7a or 7b.

On the account where I have a taxable amount (gain), I can see where I report the gain (line 2a). On the account where I have a loss, do I just put zero in the taxable amount rather than the loss ?

7a. 7b is just a box to check IF the account is an IRA.

For a loss, just use -0-.

Good information here. I too had an excess contribution to my roth ira in 2007. I contributed $4000 too much in 2007, my custodian sent me a check for $3700 in 2008 after computing the returns as a loss.

According to the IRS instructions for 1099-R, I have done the following:

Box 1: $3700
Box 2a: 0
Box 5: $4000
Box 7: codes P and J
And I denoted it as a 2008 1099-R.

However, I don't see where I can claim the $300 loss as a deduction. Do I get to claim the loss on my 2008 return, or have I done something wrong?

Thanks for the advice.

Sounds like your tax program wants you to dummy up the expected 1099R for next January. If so:
Do 1 and 2a as you have
Ignore Box 5 (a designated Roth is a Roth 401k, not IRA)
Box 7 OK; 2008 1009R - OK

You cannot claim the loss on any return unless you have totally distributed ALL your Roth IRA accounts. I don't think you have done that. All you have is a loss on the amount of your excess contribution during the time it was in the Roth.

You should also try to locate a screen to allow you to make a narrative statement, eg " I contributed 4,000 to my Roth IRA on xx/xx/2007, and on xx/xx/2008 I withdrew the entire contribution, which was then valued at $3,700."

This assists the IRS in understanding what you are reporting since they do not get their 1099R until next January either.

Alan, your assumptions about my dummied up 1099R and the fact that I am not draining all Roth IRA accounts are correct.

I will delete the info in box 5 now that you've educated me on what a designated Roth account means. And I do have some text in there describing what transpired for the benefit of anyone trying to analyze my return.

Thanks for your help. I was hoping I could claim the loss somewhere but that's just not the case in my situation.

Why would the previous poster use codes "P" and "J" on line 7. I thought code "P" was for a return of contribution taxable in 2006, but code "8" was used for a return of contribution taxable in 2007 - as is the case.

Also, is the code "J" only needed if this is an early distribution (i.e. before 59 1/2), whereras since I'm over 59 1/2, I only use the "8" with no second code.

I agree with mckennat about the codes. But I have another question. In my situation I had an excess 2007 Roth contribution reclassified as a 2008 Roth contribution last week. I never received a physical distribution, but did receive a statement from my custodian telling me that my $4500 contribution was now valued as $4200. Should I even bother showing a distribution on line 15a or will this just confuse the IRS? I'm attaching a statement to my return but not sure what or where else to report anything.