This week's Slott Report Mailbag inquires about Roth IRA contribution eligibility, what to do when excess contribution penalties are delivered due to administrative error and the always-confusing 5-year rules for Roth IRAs. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
1.
If my wife gets paid for helping my daughter to do spring cleaning and other housework in 2014, will she be allowed to contribute her salary up to $6,000 to her Roth IRA?
Thanks
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Assuming your wife’s payment is bona fide compensation or earned income, she can make an IRA contribution based on that income. If you are employed, she can make a contribution based on your income also.
2.
Dear Slott Report,
I am a long time subscriber and appreciate all that I have learned from you over the years. I had a $40,000 CD mature and went to the bank to move the money to a savings account. For some reason, the bank employee filled out an IRA contribution form, which I did not notice. This resulted in a $40,000 IRA excess contribution. My tax preparer (not a CPA) did not notice the error until I received a penalty notice from the IRS. The bank has “moved” the money to a savings account, but is not otherwise being very helpful. Do you have any suggestions other than paying for a PLR (private letter ruling) from the IRS? This was an obvious error, and it just doesn’t seem right to owe a 6% penalty.
Thanks very much
Answer:
Unfortunately, there is no exception to the IRS 6% excess contribution penalty (or for the taxes due on the IRA distribution) for bank error or for your confusion in filling out the IRA documents. You may want to see if the bank will agree to pay for some of your IRS penalties and the taxes due on the IRA distribution due to their part in the mistake. You should also consult with a competent tax advisor because the IRA distribution is taxable to you because it exceeded the annual IRA contribution limit for the year, in addition to the 6% penalties that are due. You might also want to contact the IRS’ Taxpayer Advocate’s office to see if this can be worked out because it all resulted from an administrative error.
3.
If I have a Roth IRA that is only a few months old and I transfer all the funds in this Roth into another existing Roth that I have had for 8 years, do the earnings on those transferred funds have to remain in the eight-year-old Roth for a minimum of 5 years before they can be withdrawn without a penalty?
Answer:
No. There is only one 5-year clock for earnings in all of your Roth IRAs. That clock began when you first opened any Roth IRA (i.e., 8 years ago). Moving Roth assets to a new or existing Roth IRA does not affect that time period. The earnings of all your Roth funds are treated as being held for 8 years.
- By Joe Cicchinelli and Jared Trexler
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