FIX/NO FIX – Correcting Retirement Transactions, and Those That are Lost | Ed Slott and Company, LLC

FIX/NO FIX – Correcting Retirement Transactions, and Those That are Lost

By Andy Ives, CFP®, AIF®
IRA Analyst
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FIX: Rolling Over the Tax Withheld on a Distribution. Was the mandatory tax of 20% withheld on your work plan withdrawal even though you intended to roll over the entire account? Did you change your mind on an IRA withdrawal and now want to roll it back, but you elected to have taxes withheld on the initial distribution? If money was withheld for taxes on a distribution from a work plan or an IRA and you want to roll over the distribution plus taxes withheld, you can make up the difference “out-of-pocket.” The money withheld and sent to the IRS is gone, but you can replace that withholding with other dollars, roll over the full amount, and have a credit waiting for you for the amount withheld when you do your taxes next year.

NO FIX: No Rollover for Non-Spouse Beneficiary Inherited IRA. If you took a distribution from your inherited IRA with the idea of moving the account to another provider via a 60-day rollover, you made an egregious error. Non-spouse owners of inherited IRAs are not permitted to do 60-day rollovers, and there is no way to put the money back. The full distribution amount is now yours to keep…along with any taxes that might apply.

FIX: Missed RMD. Failure to take a required minimum distribution (RMD) is commonplace. Whether it is an RMD from your own IRA, the year-of-death RMD for a recently deceased account owner, or an RMD from an inherited IRA, they are frequently missed. While the penalty is 50% of the untaken RMD amount, there is a fix. Take the missed RMD. Properly complete tax Form 5329 (“Additional Taxes on Qualified Plans”). Fall on your sword in a letter to the IRS and say that it will never happen again. You should have a positive outcome.

NO FIX: Unwanted Roth Conversion. If you did a Roth conversion and decided later that you could not afford the tax bill, or maybe the Roth conversion disqualified you from financial aid, there is no going back. Roth conversions are permanent and cannot be recharacterized.

FIX: Changing a Roth Contribution to a Traditional IRA (or vice versa). While recharacterizing a Roth conversion is off the table, recharacterizing a Roth contribution is still an option. If you made a contribution to a Roth IRA and later learned that you did not qualify due to the income restrictions, or if you made a contribution to a traditional IRA and later learned that you could not deduct the contribution, both of those contributions can be recharacterized (changed) to the other type of IRA. It will be as if the original contribution was made to the proper IRA. The deadline for recharacterizing a contribution is October 15 of the year after the contribution. (Or you could simply withdraw the contribution by the same cut-off date.)

NO FIX: Botching a Net Unrealized Appreciation (NUA) Transaction. If you are eligible for NUA and fail to complete a lump sum distribution after a trigger event, or if you roll over your company stock to an IRA, there is no going back. The NUA opportunity is lost forever.

FIX: Excess IRA Contribution. Before the October 15 deadline? Remove the excess contribution plus all net income attributable (NIA). No tax forms due, no 6% penalty. After the deadline? Remove the excess, file Form 5329, and pay the 6% penalty. (Surprisingly, the NIA can remain in the account when the fix is addressed after the deadline.)


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