HELP IRA contribution mistake by financial institution

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Topic Author
2bdbest
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Joined: Mon Jan 06, 2014 2:34 pm

HELP IRA contribution mistake by financial institution

Post by 2bdbest »

I am 41 years old and I have a roth Ira and in dec 1 2014 sent 2 checks for contributions. Check #1 $500 and in check memo wrote "2013 contribution"; Check #2 $5,500 and in memo wrote "2014 contribution"
Few days later when and check my account i find out that they did 2014 contribution $6,000. I contacted them right away and spoke with rep on the phone and explained that I wrote 2 checks with distributions for 2 different years and that i see that is all in 2014 for a total of 6000 and thats not correct and also because of my age of 41 i can not contribute more than 5,550. she told me to write a letter letting them know to move the excess $500 to year 2015. So I did.
Now i received a letter from the financial institution saying that since i made the mistake of over contributing i might have taxt implications with irs and that i need to write a more detail letter with exact amount of excess contribution, date transaction was made and that i am aware of taxes implications, and expecific amount of dollars and funds from where i want to remove money from.

Please help. They were the ones that made the mistake. if they noticed thati could not contribute the $500 to year 2013 because is past the date...they should have returned that check back to me..right???

Please advise on what options i have.

Tnx
Laura
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Re: HELP IRA contribution mistake by financial institution

Post by Laura »

You are not eligible to add money for $2013 so this caused part of the problem. You now need to withdraw the excess money from the roth. If you do it quickly you shouldn't have too much income on the investment which means almost no tax impact.

When you choose this method of correction, you’re required to report and pay tax on the net income attributable to the excess in the year of the contribution, even if you take it out during the following year, before the return due date. The earnings will be taxed like any other taxable distribution of earnings from a Roth IRA, and will be subject to the early distribution penalty if you’re under 59½.

I would move quickly to get the money withdrawn to minimize any income.

Once you get the money out then you can work on putting it back in for 2015 but for now, fix the over contribution as step 1. The financial institution should be able to do this quickly.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

Thank you Laura.
I also read that another option is to ask financial institution to move the excess $500 for contribution for 2015 and pay 6% tax on $500 ($30) for overcontributiong in 2014?

I am just don't want to make this too complicated...
I have a kid that is college bound for next fall2015 and i don't want to make things complicated for financial aid and tax stuff
Last edited by 2bdbest on Thu Jan 01, 2015 10:42 pm, edited 1 time in total.
Laura
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Re: HELP IRA contribution mistake by financial institution

Post by Laura »

The 6% penalty is on earnings if you don't take it out this year. You have time to get this fixed. Also, such a small error shouldn't impact financial aid calculations.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

2bdbest wrote:Thank you Laura.
I also read that another option is to ask financial institution to move the excess $500 for contribution for 2015 and pay 6% tax on $500 ($32 sic) for overcontributiong in 2014?

I am just don't want to make this too complicated...
I have a kid that is college bound for next fall2015 and i don't want to make things complicated for financial aid and tax stuff
If you leave the $500 in, then you would only pay the 6% excise tax on the $500 for overcontributing. That $30 can sometimes be less than the fee a Roth custodian would charge you to fix things. Also, you will need to "remove" (note the quotes) the overcontribution in 2015 or get another penalty. However, one can simply contribute LESS in 2015 by $500 and it is all fixed.

That's what we did a few years ago when the gains on the overcontribution were more than 6%.

Here's a thread on Roth overcontribution and how to correct it:
http://www.bogleheads.org/forum/viewtop ... 2&t=108959
and
http://www.bogleheads.org/forum/viewtop ... 1&t=112719
Last edited by livesoft on Fri Dec 26, 2014 7:27 pm, edited 1 time in total.
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

livesoft wrote: If you leave the $500 in, then you would only pay the 6% excise tax on the $500 for overcontributing. That $32 can sometimes be less than the fee a Roth custodian would charge you to fix things. Also, you will need to "remove" (note the quotes) the overcontribution in 2015 or get another penalty. However, one can simply contribute LESS in 2015 by $500 and it is all fixed.

That's what we did a few years ago when the gains on the overcontribution were more than 6%.

Here's a thread on Roth overcontribution and how to correct it:
http://www.bogleheads.org/forum/viewtop ... 2&t=108959
and
http://www.bogleheads.org/forum/viewtop ... 1&t=112719
So let me get this straight.
I should just take out the excess $500 right away?
What happens to the interest that the investment of the $500 made?
Would i still have to pay %6 tax?
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

It is your choice whether to leave the $500 and pay 6% = $30 excise tax or to take out the $500 right away. Leaving it in does not involve your custodian or any checks or any action. The cost to you is $30. The gains do not matter at all in that case. Please read the threads I linked. You can also read the IRS rules and fill out Form 5329 Part IV if you like to see how it works.
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livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

If you like instead, you can have your custodian remove $500 and its earnings for you. Do they charge you for that?

I would not let them call that the 2015 contribution, but would get the money away from them. One reason is that you cannot make a 2015 contribution until it is 2015. That is, you cannot make a 2015 contribution in 2014. Some time next year in 2015 when this is all cleared up, then I would make 2015 contributions.
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

@livesoft
I just read the threads and also some info on the ira site.

i think the lesser of both evils is to leave the excess $500 in the roth ira and just pay (6% =$30 penalty).
now questions:
Is there anything i need to do if I decide to just leave the money $500 in the roth?
I read that if I don't do anything I will have to keep paying (%6 penalty) year after year until I fix this over contribution.

I will definitely open a new ira with Vanguard in January 2015 and make the 2015 contributions. I know that for my 2015 max limit contribution of $5,500 I will need to deduct the $500 therefore just writing a check for $5000.
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

2bdbest wrote:@livesoft
I just read the threads and also some info on the ira site.

i think the lesser of both evils is to leave the excess $500 in the roth ira and just pay (6% =$30 penalty).
now questions:
Is there anything i need to do if I decide to just leave the money $500 in the roth?
I read that if I don't do anything I will have to keep paying (%6 penalty) year after year until I fix this over contribution.
I know that for my 2015 max limit contribution of $5,500 I will need to deduct the $500 therefore just writing a check for $5000.
Yes, if you leave the $500 in, then you need to make sure that you are allowed to contribute at least $500 in 2015 (must have compensation, must not be over income limits, etc.) and also reduce your limit by $500 to $5000.

I do wonder if the custodian has to do something with their 5498 forms for 2014 and 2015 to shift the $500 though. Perhaps we can get Alan S. to comment on that. It does look like Form 5329 Part IV takes care of that, but you will have to file that form for both 2014 and 2015.

Also interesting is that you probably have a loss if invested in equities since the beginning of December. What happens if you withdraw $500 then? I don't know.
Last edited by livesoft on Fri Dec 26, 2014 7:37 pm, edited 1 time in total.
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

livesoft wrote:If you like instead, you can have your custodian remove $500 and its earnings for you. Do they charge you for that?


I will have to call mainstay on Monday and find out if they charge for this.
do they calculate the earnings made on the $500 or do I have to give them $ amounts of earning ?

I would not let them call that the 2015 contribution, but would get the money away from them. One reason is that you cannot make a 2015 contribution until it is 2015. That is, you cannot make a 2015 contribution in 2014. Some time next year in 2015 when this is all cleared up, then I would make 2015 contributions.
Yes, I realized that I have to wait to 2015 to actually make the contribution.

So which one do u think is the best option? teake the $500 and earning back? or have it made contribution for 2015 as soon as january gets here?
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

The earnings are probably negative, sorry about that. So I do not know what is best or simplest for you. For me, it was definitely better to pay the 6% excise tax because our earnings were over 20% and would have been taxed instead of tax-free.
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Alan S.
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Re: HELP IRA contribution mistake by financial institution

Post by Alan S. »

The choice of whether to remove the excess contribution or leave it in and apply it to the following year on Form 5329 depends on these two factors:
1) The tax impact of removal of the excess vrs that of paying the excise tax and applying the excess to the following year.
2) Since we are dealing with small amounts, the ease of reporting come into play.

Taxpayers place different values on the tax and ease of filing variables.

But if there is an investment loss, removal will save on taxes by avoiding the excise tax. It is also easier to report since there will be no earning to be taxed or penalized. But you do have to include an explanatory statement with your return. Further, it is now so late in the year that a corrective distribution may not get processed in 2014, meaning your 1099R is delayed until Jan, 2016 and the explanatory statement is more critical.

As investment gains increase, leaving the excess in any paying the 6% is easier because it avoids distribution and penalty on the earnings. But you need a real hefty earnings % to turn the excise tax into a net savings. You do NOT have to contact the custodian to leave the excess in. You carry over the excess to the following year by filing a proper 5329 for the contribution year and another 5329 for the following year to document that the excess has been applied and no more excise taxes are due.
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

@Alan S, Many thanks for dropping buy and adding to the thread. Only tonight did I learn that I have to file 5329 again. Now I have to go see where I messed up my input to TurboTax. Thanks!
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Dale_G
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Re: HELP IRA contribution mistake by financial institution

Post by Dale_G »

As others have pointed out you could not have made a contribution for the 2013 in December of this year, but the damage will be small. Simply remove the money. You will get a 1099r form that shows the return of the excess contribution. TurboTax or any other tax preparation program should be able to handle things without any problem.

While there are probably ways to beg forgiveness from the IRS, the effort will probably not be worth your time and aggravation.

In the future, do not rely on the memo line of a check. Either use investment slips provided by the institution or write a very short letter of instruction to accompany the checks.

I hope you find a quick and easy way out of this. A simple mistake should not end up being a big deal.

Dale
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

Alan S. wrote: You do NOT have to contact the custodian to leave the excess in. You carry over the excess to the following year by filing a proper 5329 for the contribution year and another 5329 for the following year to document that the excess has been applied and no more excise taxes are due.
let me see if i got this right.

If I leave the excess $500 in the roth Ira made in 2014. When filing taxes (April 15 2015)just mention to my accountant that I need to file a 5329 for tax year 2014 for the excess amount of $500 to be carry-over as ira contribution for 2015?. Also when the time comes to file taxes for year 2014 (April 15 2016) file another 5329 to let IRS know I have no more excess leftover?
When would I pay the 6% penalty for 2014 year excess was made?
Should I assume that an accountant should be familiar with this things and know how to proceed??????
Note:
what happens to whatever earnings it made in 2014? what about if there were any losses?
livesoft
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Re: HELP IRA contribution mistake by financial institution

Post by livesoft »

The penalty will be calculated on your 2014 return and paid with it (filed in April 2015 or at least before mid-October 2015 if extension).

It turns out that I did not file a 5329 the 2nd year when I should have. I will probably not file an amended return unless the IRS sends me something about it. Perhaps the IRS already knows from the 5498 it gets, but I doubt it.

Or maybe I will file an amended return since I have never done an amended return before and it would be good practice.
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

@livesoft

how does the IRS gets the 5498? do i send it or financial institution? also what is the 5498.
sorry for all this questions
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tfb
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Re: HELP IRA contribution mistake by financial institution

Post by tfb »

The title is wrong. It was not a mistake by financial institution.
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Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

tfb wrote:The title is wrong. It was not a mistake by financial institution.
If I wrote the check of $500 and stated "2013 Contribution" why did they made it a 2014 contribution?
they should have returned the check or contacted me, no?
fposte
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Re: HELP IRA contribution mistake by financial institution

Post by fposte »

2bdbest wrote:
tfb wrote:The title is wrong. It was not a mistake by financial institution.
If I wrote the check of $500 and stated "2013 Contribution" why did they made it a 2014 contribution?
they should have returned the check or contacted me, no?
They made it a 2014 contribution because that was the only year you could have made a contribution for at that point, and because the Memo field isn't where they look to find instructions.

I also think tfb is pointing out the fact that the original mistake was your sending a contribution for the wrong year, not what the institution did, so the problems come from your contribution error and not the financial institution.

I've made mistakes like that too; it's not a big deal.
Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

fposte wrote:
I also think tfb is pointing out the fact that the original mistake was your sending a contribution for the wrong year, not what the bank did, so the problems come from your contribution error and not the financial institution.
Ok, but i added a hand written note on paper letting them know how i wanted each check for each year distributed among the funds.
I totally get that i send the check for a contribution of a wrong year (I did not know this) but at least they should have somehow contacted me. They did follow the note just partially, meaning they distributed among the funds just like I indicated.
dbr
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Re: HELP IRA contribution mistake by financial institution

Post by dbr »

Do people really contribute money to accounts such as this by mailing checks with hand-written notes to an unknown recipient in a bank who may or may not pay attention to what they are doing? I would have thought that one would have electronic access to transfer funds electronically, or if one is mailing a check there would be a form to accompany the check to correctly specify all the needed data. Such a form would identify a 2013 contribution which would then be rejected if submitted in 2014.
Topic Author
2bdbest
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Re: HELP IRA contribution mistake by financial institution

Post by 2bdbest »

dbr wrote:Do people really contribute money to accounts such as this by mailing checks with hand-written notes to an unknown recipient in a bank who may or may not pay attention to what they are doing? I would have thought that one would have electronic access to transfer funds electronically, or if one is mailing a check there would be a form to accompany the check to correctly specify all the needed data. Such a form would identify a 2013 contribution which would then be rejected if submitted in 2014.
I contacted Mainstay yesterday to ask for a form to contribute to 2015, they told me there is no such form. The options they gave me are:
1) Write a check (write 2015 contribution on memo)
2) Give them a void check so i could transfer the money directly out of my checking account.

I am here in this forum to learn. So I would appreciate any help given.

Cheers
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