New clients for 2023. In reviewing documents I discovered they made contributions to Roth IRAs, but their income was too high to allow the contributions. We contacted the financial advisor and they agreed to return the contributions and earnings, Net Income Attributed (NIA), for 2023, and 2024 as they were still making contributions. We filed for extension to give time to sort this out and the funds were returned by April 15, 2024. So my understanding is no harm no foul, nothing to report.
But, I reviewed 2021 and 2022 tax years and discovered the same situation. Contributions made with too high of income. These mistakes were not caught, and the funds remained in the accounts until I brought it to the attention of the financial office. They pulled the contributions out, also by April 15, but said NIA “couldn’t be taken”. I think It means they couldn’t or wouldn’t calculate the amount of earnings. Maybe because they were made throughout the year or they had losses. I don’t know. Will that be a problem when I get the 1099R for 2024 or will the IRS be clueless on the earnings as well?
My understanding is that all the funds returned, including earnings, will be reported on the 2024 1099R. Any words of caution on how that might play out would be helpful.
I will be filing form 5329 for each spouse for the years 2021, 2022, and 2023. The form is needed for 2023 since the 2021 and 2022 funds were not removed in a timely fashion and were in the account for the entire 2023 year and will be subject to penalty. The 2023 form 5329 will be filed with the return, and the 2021 and 2022 forms will be filed separately with checks for each form.
Question, will the IRS add penalties and interest for those late filings? I never encountered this situation before and would like to give the clients a heads up on what to expect. Also, the financial advisor has agreed to cover the penalty costs and my fees for the added work. I’d like to give them a heads up as well.
If you can think of any other advice, I would appreciate your input.
But, I reviewed 2021 and 2022 tax years and discovered the same situation. Contributions made with too high of income. These mistakes were not caught, and the funds remained in the accounts until I brought it to the attention of the financial office. They pulled the contributions out, also by April 15, but said NIA “couldn’t be taken”. I think It means they couldn’t or wouldn’t calculate the amount of earnings. Maybe because they were made throughout the year or they had losses. I don’t know. Will that be a problem when I get the 1099R for 2024 or will the IRS be clueless on the earnings as well?
My understanding is that all the funds returned, including earnings, will be reported on the 2024 1099R. Any words of caution on how that might play out would be helpful.
I will be filing form 5329 for each spouse for the years 2021, 2022, and 2023. The form is needed for 2023 since the 2021 and 2022 funds were not removed in a timely fashion and were in the account for the entire 2023 year and will be subject to penalty. The 2023 form 5329 will be filed with the return, and the 2021 and 2022 forms will be filed separately with checks for each form.
Question, will the IRS add penalties and interest for those late filings? I never encountered this situation before and would like to give the clients a heads up on what to expect. Also, the financial advisor has agreed to cover the penalty costs and my fees for the added work. I’d like to give them a heads up as well.
If you can think of any other advice, I would appreciate your input.
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