I made a mistake with an IRA contribution

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Hexdump
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I made a mistake with an IRA contribution

Post by Hexdump » Mon Mar 16, 2015 11:54 am

and just realized it while doing our taxes.

During the furor over the PenFed 5 year CD at 3%, I jumped all over it and contributed the IRA max of $6500.
OOPS !!

I had forgotten that my wife would be retiring in 2014 and was limited on how much she could contribute. Yikes !!

So, to avoid whatever penalties there are, my idea was to recharacterize (or whatever the verb is), it into a Roth.
Is that the best way ? If not, do I have many other options ?

thanks a ton.

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dodecahedron
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Re: I made a mistake with an IRA contribution

Post by dodecahedron » Mon Mar 16, 2015 11:59 am

Are you saying she was limited because she had less than $6,500 in earned income due to her retirement?

Even if she didn't earn the full $6,500, she may still be eligible to contribute the full amount as a spousal IRA if you had enough earnings to spare of your own.

Check the total of the box 1 amounts on all the W-2s either of you had plus any self-employment earnings for either of you. If those total more than $13,000, you should each be able to contribute $6,500 (assuming you are both over 50.)

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Hexdump
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Re: I made a mistake with an IRA contribution

Post by Hexdump » Mon Mar 16, 2015 12:05 pm

Yes, she only earned $1800 and I only have Social Security, an annuity, and investment sales.

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Epsilon Delta
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Re: I made a mistake with an IRA contribution

Post by Epsilon Delta » Mon Mar 16, 2015 12:12 pm

Roth contributions and traditional IRA contributions both require earned compensation. You don't have enough income for a traditional IRA contribution and you don't have enough income for a Roth contribution. So a conversion will not help.

Your best option is probably to take a corrective distribution of the excess over wife's $1800 compensation.

If PenFed will subject a corrective distribution to a large penalty and one of you is working in 2015 you might have had other options, but you probably don't want to go back to work for this.

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Hexdump
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Re: I made a mistake with an IRA contribution

Post by Hexdump » Mon Mar 16, 2015 2:45 pm

Thank you Epsilon. Color me educated in that I did no know about the limits also applying to a Roth.
As the investment is a 5 year CD, I will need to see what kind of penalty I will incur if I cash it in early.
I really don't want to do that, so maybe PenFed can magically re categorize the account as a normal interest bearing savings CD.
I guess that it is also going to depend on what kinds of penalties the IRS will impose.

Sheesh.

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Epsilon Delta
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Re: I made a mistake with an IRA contribution

Post by Epsilon Delta » Mon Mar 16, 2015 11:33 pm

From memory, so please verify.

If your wife is over 59.5 there is no penalty to taking a corrective distribution before April 15th. You do have to take the earnings associated with the excess contribution and these will be taxable in the year the distribution was made (2015) not the year the excess contribution was made (2014). If she's under 59.5 the IRS also has a 10% early withdrawal penalty. But 10% of 3% of $6,500 is, uh, not much.

If you don't take the corrective distribution before the due date there is a 6% excise tax each year the excess contribution remains in the IRA. Since the CD is earning 3% this will be an inferior option, unless PenFed has a truly swingeing early withdrawal penalty.

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Hexdump
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Re: I made a mistake with an IRA contribution

Post by Hexdump » Tue Mar 17, 2015 6:56 am

Well, after some more research it looks like I need to do this. My wife is 58 but I am hoping that won't matter.

The $6,500 was sort of a gift from me and I got the $6,500 as a normal distribution from my traditional IRA.
So, what I need to do is convince PenFed that the IRA account in her name should be a normal, share account. She can keep it in her name. The earnings during 2014 will need to be reported as income but I dont think we will incur an early withdrawal penalty.

At least I hope that is possible to do.

Alan S.
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Re: I made a mistake with an IRA contribution

Post by Alan S. » Tue Mar 17, 2015 12:00 pm

OK, a 6500 TIRA contribution was made in 2014, but since earned income was only 1800, there is an excess contribution of 4,700 that needs to be returned from the IRA with earnings. The earnings is calculated to date, but will be taxable on your 2014 return because the contribution was made IN 2014. The earnings will also be subject to the 10% penalty, since your wife is not yet 59.5. You probably want to get the corrective distribution done now, so you will have the earnings figure to complete your 2014 return.

Leaving the 1800 in the TIRA will give you a deduction of 1800.

But better check with Penfed whether leaving just 1800 in the CD is possible without any additional costs.

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