IRA overpayment
What’s my plan of action? I transfered $6000 into my 2008 IRA. NOW, I find out my military retirement isn’t earned income. I’m disabled and can’t work. My wife resigned her job last July and most likely won’t be returning to work in 2008.
Thanks
Chuck
Permalink Submitted by Alan Spross on Tue, 2008-03-25 22:08
Chuck,
If the source of the transfer was a regular IRA contribution and NOT a rollover. then you will have an excess contribution to correct unless your wife or yourself takes a position resulting in earned income prior to year end. If you think that is not possible, then tell the IRA custodian that you want your full contribution returned now. They will also make an earnings allocation, plus or minus. The earnings, if any will be taxable, but there will be no penalty if you are totally disabled (eg SS Disability) or are over 59.5.
You should probably wait until the “most likely” becomes a near certainty. You may also qualify for the Savers Credit, which could be worth up to $1,000 if she generates just 2,000 in earned income. However, there are restrictions = see Inst for Form 8880.
Permalink Submitted by Chuck Reisinger on Tue, 2008-03-25 23:20
Thanks Alan for your response.
Would this work? Leave the $6000 as an over payment for 2008, then take the OP in Mar 09. Vanguard confirmed that I can do this and request a 6 month extension. ?????????
I figure if I’m goinng to pay 10% now or later, what’s the difference? Some of the interest will offset the money to the IRS.
Permalink Submitted by Alan Spross on Wed, 2008-03-26 01:08
Since this is a 2008 contribution, you have a long time to correct it. The deadline is your extended due date of 10/15/09. You qualify for the 6 month extension from 4/15/09 to 10/15/09 by either filing your 2008 return on time or by filing a timely extension on Form 4868.
Assuming OP means over payment, if you waited until 3/09 and then corrected the excess contribution, the only consequence is more earnings on the contribution and therefore a higher 10% penalty on those earnings. That’s not a real costly penalty unless you have real good earnings. You would then have the final information to file you 2008 return on time, and would include the earnings and penalty on your 2008 return. If you waited past 4/15/09, then you would either have to file an extension or amend your completed return. Having to do an amended return should be avoided if you pay someone to do it. Note that the 10% penalty applies to the earnings, NOT the original contributed amount. If you have no earnings, then there is no penalty.
But you do have time to wait at this point until you know whether you really will need to correct it or not. By the way, if you correct the contribution now, and then things change later in the year, you can make another contribution for 2008. Correction does not forfeit your ability to make a later contribution.