What procedure applies to a taxpayer who made excess contributions for 2001, 2002, 2003 and 2004 and has neither withdrawn the excess and the earnings for 2001-2003, nor recharacterized 2004 to a Traditional IRA? How are multiple years such as this to be

By Denise Appleby AAA
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)

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