ROTH EXCESS CONTRIBUTIONS FOR 14 YEARS! Regular tax & 6% tax too?

[sandigi]

Client was new to me for 2013 tax year. He retired in 2001 at age 53 and has been making contributions into a ROTH from 2001 to 2014. He had -0- earned income for each of those years.

When we discussed that he couldn't contribute to an IRA if he had no earned income, he withdrew the 2013 and 2014 contributions of $13000 (6500 each year). I was expecting those 2 1099R forms, and know how to handle them. The contributions were removed in time not to be subject to the 6% tax.

He then removed all contributions and closed out the ROTH in 2014. Received $56,559.
Total amount of contributions is unknown at this point but he "thinks" maybe he contributed the maximum amount each year.
I've calculated the maximum contributions for age over 50 from 2001 to 2012 and it would be 57,000.

All of his ROTH distributions are taxable since they weren't allowed in the first place.

Is he subject to the 6% excise tax? I'd need more concrete info to calculate that, namely his detailed years and dollar amounts - But I want to be sure I'm telling him the right thing.

[RitaB]

Well, yikes.

All of his ROTH distributions are taxable since they weren't allowed in the first place.

Is he subject to the 6% excise tax? I'd need more concrete info to calculate that, namely his detailed years and dollar amounts - But I want to be sure I'm telling him the right thing.

His contributions are NOT subject to income tax, as they were not tax deferred when contributed (the income tax has already been paid), and yes, he owes 6% excess contribution tax per year on excess amounts not withdrawn.

Wowzers, I'm glad you're telling him, not me. Here's an article that may help:

http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/excess-contributions-to-roth-iras/

[kathyc2]

The IRS computers didn't kick out a notice in all those years of receiving 5498's and no earned income?

[Burke]

Makes you wonder why vendors even report it. Had the same problem. 78 year old with no income takes out a ROTH. Do the custodians/sellers of these things even ask such a question when they apply for them?

[kathyc2]

Makes you wonder why vendors even report it. Had the same problem. 78 year old with no income takes out a ROTH. Do the custodians/sellers of these things even ask such a question when they apply for them?

I just can't believe some basic things IRS computers aren't programmed to catch. Had a situation a few years ago regarding AOC. Client didn't know how many years parents had claimed AOC and it was a rather ugly situation so called IRS asking if they could tell her how many years it had been claimed for her and was told they don't track number of years by student SS#, just by person claiming SS#. WTH?

[sandigi]

Thank you Rita!

[QUOTE=RitaB;172498]His contributions are NOT subject to income tax, as they were not tax deferred when contributed (the income tax has already been paid), and yes, he owes 6% excess contribution tax per year on excess amounts not withdrawn.

Wowzers, I'm glad you're telling him, not me.

Oh my gosh Rita, how did I overlook that? So I need to get his accounting for contributions he made from 2001-2012 and the Roth contribution amount is not taxable, right?

But do I understand this? If he has profit, that is taxable? (since the contributions weren't allowed in the first place.) And if he has loss, that is deductible? (I know I read that somewhere that you can take the loss on an IRA when all funds from the IRA have been distributed, but I can't remember if that is all IRA's? For example, this is the only ROTH he had and he closed it out and he thinks he might have a loss. But he also has a traditional IRA).

The 6% per year. Does that mean if he contributed $2000 in 2001. He owes $120 per year for 14 years or $1680 just for the 2001 excess left in?
And if he contributed $3500 in 2002 he owes $210 per year for 13 years or $2730 for the excess left in?

I love the word "wowzers" so can I use it with him? Actually, I did tell him. Last year. That's what scared him into taking it all out!

You're gonna love this. He got married last year. Guess who has been handling his new wife's ROTH IRA and the contributions for the past 7 years or so since they've been together? Oh my, I've got a lot of info to gather. She also depleted the Roth and received three form 1099-R's.

[sandigi]

No

The IRS computers didn't kick out a notice in all those years of receiving 5498's and no earned income?

NO. I actually wouldn't have even known he made a Roth contribution except he gave me his account statement.

[sandigi]

The investment people recommend it without asking questions

Makes you wonder why vendors even report it. Had the same problem. 78 year old with no income takes out a ROTH. Do the custodians/sellers of these things even ask such a question when they apply for them?

Per client, he says his investment advisor recommend it. "If you have money you don't need, put it into a ROTH and let it grow tax deferred so you can take it out later and pay no tax on it." They don't mention to do this during your working years. Actually this guy said he thought his pension was "earned income". Yesterday, he said "You wouldn't believe the number of people doing this. Many of my retired friends talk about it all the time! They're socking money away in their Roths."

Last year, one of my young clients was talked into taking his Traditional IRA money out and converting to a ROTH. He is an investor and his income is up and down. This particular year he was in a 25% bracket. I had him recharacterize it in time, but I wonder why the financial advisors aren't asking "What tax bracket are you in?" or if they would simply advise . . . "Why don't you ask your tax advisor if that would be good for you?"

Thank you everyone for your comments. I feel less lonely now . . .I love this board!

[RitaB]

I'm not yelling, but my answers are in CAPS

[QUOTE=sandigi;172523]

So I need to get his accounting for contributions he made from 2001-2012 and the Roth contribution amount is not taxable, right? -- CORRECT, CONTRIBUTIONS TO A ROTH ARE AFTER INCOME TAX.

If he has profit, that is taxable? (since the contributions weren't allowed in the first place.) -- YES

And if he has loss, that is deductible? -- YES, CONDITIONS APPLY - https://turbotax.intuit.com/tax-tool.../INF14172.html

The 6% per year. Does that mean if he contributed $2000 in 2001. He owes $120 per year for 14 years or $1680 just for the 2001 excess left in? -- HE OWES 6% ON EXCESS NOT WITHDRAWN PER YEAR THAT IT IS NOT WITHDRAWN

And if he contributed $3500 in 2002 he owes $210 per year for 13 years or $2730 for the excess left in? -- SEE ABOVE

I love the word "wowzers" so can I use it with him? -- YES. YES, YOU CAN. AND YOU SHOULD.

You're gonna love this. He got married last year. Guess who has been handling his new wife's ROTH IRA and the contributions for the past 7 years or so since they've been together? -- NOBODY. OH, THINGS HAVE BEEN "DONE," BUT NOT HANDLED.

She also depleted the Roth and received three form 1099-R's. -- SHE'S A 10, AIN'T SHE? THAT'S WHAT HAPPENS WHEN YOU MARRY A 10. LET THAT BE A LESSON TO YOU.

OK, that's not the best way to respond, but it's April 8.

[sandigi]

Love it!

[QUOTE=RitaB;172526]

OK, that's not the best way to respond, but it's April 8.

Thanks again! For the precise answers, and also for the chuckles . . . So I should stay unmarried?

[RitaB]

Not at all

[QUOTE=sandigi;172527]

Thanks again! For the precise answers, and also for the chuckles . . . So I should stay unmarried?

No, but, you should wait till you meet a smart, funny, low maintenance eight. You're welcome.

[sandigi]

wait for an eight

[QUOTE=RitaB;172529]

No, but, you should wait till you meet a smart, funny, low maintenance eight. You're welcome.

Ok, thanks for the advice and I can remember this cuz it rhymes . . . Wait for an Eight!!

[BP.]

. . Wait for an Eight!!

Just be careful if you do your waiting in a bar . . . the 2 at 10 (pm) can become a 10 at 2 (am.)

[RitaB]

Word

Just be careful if you do your waiting in a bar . . . the 2 at 10 (pm) can become a 10 at 2 (am.)

This is why our clients think we are brilliant. We really have some wisdom, I have to say...

[Burke]

Rita, baby, you been gone too long.......