Nondeductible IRA

[Unregistered]

I am processing an amended return for a new client. The client received a Amended K-1 from her father's estate. The amended K-1 increased her interest, dividend and trust income. Her husband works and contributes to a 401(k). Both taxpayers are over 50.

My problem is this:

On the original return they had a $5,900 deduction for IRAs; $2,400 him, $3,500 her. Because of the increase in their income, $1,600 of his IRA is now nondeductible.

1) Will the 6% excise tax apply in 2005 if he does not convert it to a Roth IRA or withdraw it?

2) Should I tell them to leave it in the IRA and take it against 2005 contribution?

As always, thank you for your help.

Noel

[abby]

not an excess contribution

If there was enough income for the contribution in the first place, then it is not an excess contribution and would not be subject to the 6% penalty.

He can call it a non-deductible contribution, fill out an 8606 to keep track of his non-deductible basis in the IRA (will mean less is taxed on withdrawal) or, if he wants a deductible, he could change it to a 2005 contribution. A ROTH is also a possiblility for a non-deductilbe contribution with different withdrawal rules.

If the return was filed with a full deduction, then that would need to be amended.

I often find that the best advise for options comes from the IRA provider in terms of what flexibility remains in moving or reclassifying a contribution. They can be a good resource in addition to the tax advise we can give in these matters.