removal of excess contribution
We have an IRA that was established by a non spouse beneficiary of QRP funds in 2008. When the IRA was established (30k) it was not established as a beneficiary IRA but was mistakenly established as the benes own IRA. In essence i believe this ended up to be an excess contribution of 25k. The bene age would have allowed for up to 5k for contribution. Since the deadline to remove the excess contribution has long past Oct 15th, 2009, what are the benes options? The beneficiaries accountant wants the IRA funds removed and coded as a withdrawal due to excess contribution. The bene is coming in to w/d the funds. How should we code it out?
Permalink Submitted by Jose Morales on Wed, 2010-07-14 15:40
It would be an excess contribution correction. Because the deadline to correct the excess has passed, they would have to pay the 6% excess contribution penalty but would not need to remove the earnings attributable to the excess. The other option would be to leave the funds in the account and pay the 6% excess contribution penalty for each year that an excess remains in the account.
Permalink Submitted by Alan Spross on Wed, 2010-07-14 19:16
If this was simply a registration error, it can probably be corrected and the stretch can still be preserved. See the following link:
http://www.retirementdictionary.com/faqs/decedentsnameinheritedira
Permalink Submitted by Linda Randazzo on Thu, 2010-07-15 12:45
Alan,
Would he also be subject to early distribution penalty (under 591/2) and taxation on the amount W/D? Also help me to understand, (i am very much the rookie) was this a failed rollover because the bene should have never made this their own IRA?
Permalink Submitted by Linda Randazzo on Thu, 2010-07-15 14:32
One other question,
If a non spouse bene of QRP funds receives a check payable to him for the total funds can the bene set up an inherited IRA or does the money from the QRP need to be direct transferred to the future trustee of the inherited IRA?
Permalink Submitted by Jose Morales on Thu, 2010-07-15 15:40
[quote=”[email protected]“]Alan,
Would he also be subject to early distribution penalty (under 591/2) and taxation on the amount W/D? Also help me to understand, (i am very much the rookie) was this a failed rollover because the bene should have never made this their own IRA?[/quote]
The distribution from the QRP to the beneficiary would not be considered a premature distribution subject to the 10% tax penalty becasue a distribution due to the death of the plan owner is one of the exceptions.
If the bene did in fact roll this money over to their own IRA, either one already established or a new one, then it is considered a contribution as the funds were not eligible for rollover. Any amount above this individual’s contribution limit for the year would be an excess contribution. If the bene was clear in asking for an inherited IRA to be established and the new custodian simply did not follow these instructions, then what Alan said is correct. The custodian can correct the titling of the account and everything should be ok, if the funds haven’t been intermixed with any other IRA funds.
Permalink Submitted by Linda Randazzo on Thu, 2010-07-15 18:15
Thanks for the reply. I just found out that the check from the QRP was made payable to Bank of America FBO ________beneficiary. The bene was told by BOA to put the check into his account. He then used a check from his personal checking account to establish his own IRA in our instituion. 😕
Permalink Submitted by Alan Spross on Thu, 2010-07-15 18:41
What happened to the original check payable to Bof A?
If the beneficiary has his facts straight, this is entirely BofA’s error. But he will need some form of proof to force them to assume responsibility for what they did. After that it would be a subjective matter of determining his loss due to the immediate taxable distribution resulting in loss of life expectancy RMDs and probably inflating his tax bracket for 2008. Add the cost of an amended tax return and interest to the IRS.
I don’t understand how many bank personnel continue to handle non spouse beneficiaries as if they were spousal. Of course, in 2008 the wheels at BofA pretty much left the tracks………..
Permalink Submitted by Linda Randazzo on Thu, 2010-07-15 21:39
I advised him to focus on the BOA misdoing and see if the IRS will be merciful. I’m thinking Alan that if he can reestablish this as an inherited IRA he only missed one distribution. Maybe he won’t get penalized on that if he can prove what happened. That was for 2008. The owner of the QRP funds died in 2007. Wouldn’t he be ok for 2009 distribution because of the ability to waive?
Permalink Submitted by Alan Spross on Thu, 2010-07-15 22:35
Yes, 2009 is no problem, and there is an IRS letter ruling that allows the delinquent years to be distributed, the 50% penalty paid on Form 5329, and the rest of the stretch preserved. In other words, he would take out the 2008 RMD this year along with the 2010 RMD, and then file the 5329 to report the 50% penalty for the amount of the 2008 RMD.
Of course, the RMD issue pales by comparison to being able to get the registration corrected without BofA issuing a 1099R for 2008. If they issue that 1099R, it would set up the following chain of events:
1) 2008 1099R includes the 2008 RMD eliminating an RMD penalties, but of course triggering a full taxable distribution.
2) Entire balance was then deemed an excess contribution to an IRA other than the extent to which he was eligible for a regular IRA contribution. A 6% excise tax would be due for 2008 and 2009 on the amount of the excess. The excess amount would then have to be distributed as an early or normal IRA distribution. This would not be taxed because the tax would already have been due for 2008 and no deduction was taken for the contribution. An earnings could stay in the IRA since the extended due date for 2008 has passed and the 6% paid. Of course, this would now be an owned IRA and not an inherited IRA.
Obviously, much better if BofA would just re title the account correctly in accord with the original check, and that would only leave one RMD plus 50% of that RMD as a penalty.
If they will not re title, then the tough decision is whether the account is large enough to be worth an appeal to the IRS or legal demand from BofA for damages. In making that decision, if he does not intend to use most of the stretch, it is probably not worth the time and expense.
Permalink Submitted by Eddie Ngo on Thu, 2014-04-03 02:58
An Individuakl contributed $5,000 to an IRA in Dec. of 2013 for the 2013 year. He now decides that he should use a SEP for 2013 for the larger contribution. However if he does than he cannot take a deduction for the IRA as he is now covered under a retirement plan, and makes too much money. Does he have the ability to withdraw this IRA contribution before the 4/15/2014 tax filing dead line, or what are his other options, or is he left with only the option of leaving it in as a non deductible contribution and file the IRA reporting form, and how often does he have to file this form.
Permalink Submitted by Alan - IRA critic on Thu, 2014-04-03 16:56
He is an active participant in the SEP IN the year he makes the contribution. Therefore, if he makes a SEP contribution for 2013 in 2014 he is a participant in 2014, not 2013. Of course, if he also made a SEP contribution in 2013 then he would be an active participant for 2013. If he is not an active participant and his spouse is not an active participant in her plan or she is and their modified AGI is not over the limit, he can deduct the TIRA contribution for 2013. But if he could only afford the SEP contribution, he can withdraw the TIRA contribution up to 10/15 with allocated earnings and re contribute using a SEP contribution. He cannot recharacterize the TIRA contribution as a SEP contribution. If his TIRA contribution is retained and is not deductible, he must file Form 8606 and in future years every time he takes a distribution or adds more non deductible contributions.