A:

If the IRA owner filed his/her 2004 tax return by the due date, including any extensions, he/she receives an automatic six-month extension to correct the 2004 excess contribution. The six-month extension begins on the due date of the return, excluding extensions. Therefore, assuming the tax filing due date is April 15, which is the case for most individuals, and the tax return was filed by April 15, the 2004 contribution can be removed as a return-of-excess along with the earnings, or recharacterized to a Traditional IRA by Oct 15, 2005. Refer to the examples below to get a better idea of how this works.

Example 1
John contributed to his Roth IRA for 2004.
John filed his tax return by April 15, 2005.
John may recharacterize his 2004 contribution to a Traditional IRA by Oct 15, 2005, or remove it as a return-of-excess contribution by Oct 15, 2005 - six months after the due date of his tax return.


Example 2
Betty contributed to her Roth IRA for 2004.
Betty filed for an extension to file her 2004 tax return by April 15, 2005.
Betty filed her tax return on Aug 15, 2005.
Betty may recharacterize her 2004 contribution to a Traditional IRA by Oct 15, 2005, or remove it as a return-of-excess contribution by Oct 15, 2005 - six months after the due date of her tax return.

For the 2001, 2002 and 2003 excess contributions, John owes the IRS a penalty (excise tax) of 6% of the excess amounts for each year the excess remained in the IRA. If these amounts are removed from the IRA by Dec 31, 2005, the 6% penalty will not be owed for 2005.

The excise tax for 2001, 2002 and 2003 can be reported on the same IRS Form 5329 and on the "other taxes" area of the income tax return.

Related information can be found in IRS Form 5329 as well as instructions.

(For further reading, see Correcting Ineligible (Excess) IRA Contributions - Part 1, Correcting Ineligible (Excess) IRA Contributions - Part 2, Correcting Ineligible (Excess) IRA Contributions - Part 3 and Avoiding IRS Penalties on Your IRA Assets.)


This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. I just learned that my 2004 and 2005 Roth IRA contributions are not allowed because ...

    The 2004 excess amount to your Roth IRA would have to be removed by October 15, 2005, to avoid the 6% penalty (assuming that ... Read Answer >>
Related Articles
  1. Retirement

    Recharacterizing Your IRA Contribution or Roth Conversion

    Learn why you might make such a transaction and find out how to calculate how it will affect you.
  2. Retirement

    Roth IRA Contribution Rules: The Basics

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, deadlines to tax breaks.
  3. Retirement

    Making Spousal IRA Contributions

    Eligibility requirements, contribution limits and tax deductions all change with one little ring.
  4. Retirement

    How to Recharacterize to a Traditional IRA

    If the technicalities of recharacterizing a Roth IRA to a traditional IRA seem dauntingly complex, here are a few simple tips to guide you through the process.
  5. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  6. Retirement

    Which Is Better, a Traditional IRA or Roth IRA?

    Traditional IRAs and Roth IRAs have different benefits, but both are great for retirement savings.
  7. Retirement

    IRA Contributions: Eligibility And Deadlines

    Use this checklist for contribution requirements to make your payments on time.
  8. Retirement

    Roth IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  9. Retirement

    An Introduction to Roth IRAs

    Be sure to consider the tax benefits and the eligibility requirements of the Roth IRA.
RELATED TERMS
  1. Recharacterization

    The treatment of a contribution as being made to another type ...
  2. Roth IRA

    A Roth IRA is an individual retirement plan that bears many similarities ...
  3. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  6. Form 8606

    A tax form distributed by the Internal Revenue Service (IRS) ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Life Insurance

    A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the ...
  3. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center