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Long week, my brain is fried....what do I need to do with this situation? IRA contribution that wasnt allowed...

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Level 15
Level 15

Client isn't eligible to put money into an IRA (discovered this when we prepared/filed the return a few days ago), he just called and told me that he forgot he already put $3500 in an IRA back in June (why people do things before knowing what they're allowed to do really irks me!).....so he called the bank and they are taking it back out today.

2019 return has already been filed ....what do I need to do with this situation at this point?   Im drawing  huge blank!


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 15

I assume you did not report on 8606 this year? He is taking corrective action by the due date of the return by withdrawing the $3,500 (plus earnings thereon I hope?). Technically the earnings for 2019 should be reported on the 2019 return. The earnings for 2020 belong on the 2020 return. I doubt that the 2019 earnings would be substantial.


ex-AllStar
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Level 15
Level 15

I did not report anything on the 8606.  Spouse was able to make an IRA contribution, so when they were at the bank he discovered that he had already made an IRA contribution for himself back last summer.

He said he was taking the 3500 out, but leaving the earnings in the account....can he do that?


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 8
Level 8

Lisa,

My first suggestion would be that you tell him that the returns have been filed and may  have to be amended... but do it after tax season. It won't make a difference to the IRS. The money has already been withdrawn so it's just a matter of paperwork. 

Technically, the earnings that the over contribution generated should also be withdrawn but it probably won't come to a hill of beans and I doubt that I'd bother.  Or if you're concerned, tell him to go back and take out another $5. 🙂

When you have a chance (after the season) look at form 5329 and 8606 and  instructions for excess contributions and excise tax to determine if it will apply. Worst case you're talking about $35.

Taking excess contributions out is good and important. But it will generate a 1099R for 2020.  The bank probably won't mark it code 8 so there's a spot on the 1099R worksheet (on page 2) where you can check return of excess contributions before return due date which should be applicable. 

Also, be certain he wasn't eligible... Don't rely on the software  I've seen instances where the retirement box is checked on the w2 and there is either no retirement program, or the TP isn't eligible or doesn't participate.    When that occurs I remove the check box from the w2 and program calculates. 

The former all stars have more knowledge about this than me... you might consider sending a note. 

It's still early  March... turn the brain flame down to simmer and have a drink. 

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Level 15
Level 15
Hes not eligible, usually he is, which is why he did it, but he changed jobs and maxed out his 401K at the new job.

If I can handle it all on 2020, that would be great! Thank you!

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 10

I think maybe we're mixing up terms.

In order to be eligible to make a Traditional IRA contribution, you just have to have earned income (or have a spouse with earned income under the spousal IRA rules).

In order to take a deduction for an IRA contribution when covered under an employer plan you have to meet certain income limits.  That does NOT affect eligibility.  It just means that amounts contributed are not deductible and you have to start tracking IRA basis on Form 8606.

It sounds like you don't need a corrective distribution, you just need an 8606.  I've filed many of these by themselves after the fact with no push-back from the IRS (there's a signature line at the bottom of the form).  In this case I think you're fine up until 4/15.  After that I think the IRS can assess a $50 late penalty but in my history of tax prep I've never seen one actually imposed.

Rick

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Level 12

I would like to comment on this: "but leaving the earnings in the account."

 

Unless this person already has basis or your decision results in having other basis, I would remove and then deal with the excess earnings for tax and any penalty, not leaving it as basis. There is a ridiculous amount of work to track this person's minimal basis from the earnings left, for years and years, when you have someone that already doesn't manage their recollection or actions well.

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"Level Up" is a gaming function, not a real life function.
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Level 12

I just came across this nice article, which mentions the 6% penalty, the 10% penalty, etc:

https://www.investopedia.com/articles/retirement/04/042804.asp

 

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"Level Up" is a gaming function, not a real life function.