Tax filing and Roth Overcontribution

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Matthew1
Posts: 59
Joined: Sun Mar 06, 2011 11:17 pm

Tax filing and Roth Overcontribution

Post by Matthew1 » Mon Jan 16, 2012 3:20 pm

Hello.

I'm hoping someone can help me out with a tax reporting question regarding an overcontribution to my Roth. Here's the background:

I made a contribution in early 2010, and then in January 2011 I realized that I exceeded the income limit to contribute. I promptly withdrew my excess contribution (in CY2011). I had been advised that the earnings are considered earned and received in the year the excess contribution was made. As a result, I reported the distribution and earnings in my 2010 form 1040, and I also filed the required forms 5329 and 8606 along with my 2010 filing.

However, because the withdrawal of the excess contributions was made in CY2011, I've received a 1099-R from Vanguard for 2011.

My question is that since I already reported the overcontribution and distribution in 2010, what -- if anything -- do I need to do for 2011?

Thanks so much!

winterescape
Posts: 261
Joined: Sun Apr 15, 2007 2:53 pm
Location: Upstate NY

Re: Tax filing and Roth Overcontribution

Post by winterescape » Mon Jan 16, 2012 3:54 pm

I did this too a number of years back and I called the IRS. They advised me to attach a letter of explanation to my return which said much what you just posted. Never heard anything more about it. I do remember that I was very pleasantly surprised by the short hold time on the phone with the IRS and I noted the persons ID number and the time and date of the call in my letter.

Alan S.
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Location: Prescott, AZ

Re: Tax filing and Roth Overcontribution

Post by Alan S. » Mon Jan 16, 2012 7:34 pm

Look at the code in Box 7 of the 1099 R. It should show a "P" (also perhaps a 1) meaning that the corrective distribution is reportable and taxable (earnings) in 2010. Since you did report this on your 2010 return, you can ignore the 1099R on your 2011 return.

Don't know why you filed an 8606 in 2010. If it was solely for THIS transaction it was not necessary. Hopefully you did not enter anything on that form that will cause an inquiry.

If the coding on the 1099R was something other than stated above, please advise.

Matthew1
Posts: 59
Joined: Sun Mar 06, 2011 11:17 pm

Re: Tax filing and Roth Overcontribution

Post by Matthew1 » Mon Jan 16, 2012 8:59 pm

Alan,

Box 7 indicates 'PJ,' as an early distribution from the previous year. My accountant advised that I would need to complete the 8606 since I had to take an early distribution to correct my error. I then included the earnings on my 1040 line 15b as taxable income.

Was this not the correct approach?

Alan S.
Posts: 7788
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Tax filing and Roth Overcontribution

Post by Alan S. » Mon Jan 16, 2012 9:15 pm

It was correct, but you did not need the 8606 because an 8606 is not used when correcting a specific excess contribution, which the P indicates you did. The taxable earnings go directly on line 15b of Form 1040 and the penalty on the earnings directly on line 58, so you did not need the 5329 either.

Chances are the 5329 was just extraneous and would not cause a problem. With the 8606 however, it would depend on how the IRS treated the entries there. It is not clear whether the IRS subtracts your regular contribution balance by amounts shown on the 8606 when the 1099R coding indicates otherwise. But if you do not take Roth contributions until after the Roth is fully qualified then it would not matter.

Matthew1
Posts: 59
Joined: Sun Mar 06, 2011 11:17 pm

Re: Tax filing and Roth Overcontribution

Post by Matthew1 » Mon Jan 16, 2012 11:23 pm

Alan, thanks a lot for the help.

Yes, it appears that I filed 8606 in error, unfortunately. I read the instructions to the form, and sure enough it advises that as long as remove the excess contribution by the due date, do not file 8606. This is contrary to what Vanguard advised, but I should have been more diligent -- my error.

Even without the 8606, I would have still indicated the same amounts on lines 15a/b on 1040, so I'm not sure of the impact of erroneously filing an 8606. I guess I'll just have to call the IRS to see what they say, unless anyone here has any additional suggestions about how to "take it back."

Matthew1
Posts: 59
Joined: Sun Mar 06, 2011 11:17 pm

Re: Tax filing and Roth Overcontribution

Post by Matthew1 » Thu Jan 19, 2012 1:01 am

I spoke with the IRS today, who (as expected) confirmed that I should not have filed either the 8606 or 5329. To remedy this, I will need to file a 1040X, along with blank forms 8606 and 5329 and a statement explaining what I did. Seems a bit senseless to file a bunch of blank forms, but the IRS indicated that this is what needs to happen to nullify the forms that I submitted in error. Since I already paid my 10% early withdrawal penalty and reported the earnings in taxable income, there is no tax impact at all. I just need to zero out the previous forms.

Thanks for the help.
Matt

618744
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Joined: Sun Jan 23, 2011 3:08 pm
Location: CT

Re: Tax filing and Roth Overcontribution

Post by 618744 » Sun Jan 29, 2012 5:37 pm

I am in the same situation as the OP, however I was told to file an amended 2010 return once I had received the (2011) 1099-R. Is this actually correct?

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