Taxpayer made IRA contributions after she turned 70.5

Technical topics regarding tax preparation.
#1
ode923  
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A client of mine is a 77 year old woman whose tax returns I prepare. She still works full time.

She had a meeting with her financial advisor who informed her about the new rules on IRA contributions--thanks to the SECURE Act, you can now make IRA contributions after 70.5.

"Slight" problem: she didn't know about this rule to begin with--she has been making IRA contributions each year...at ages 71, 72, 73, 74, 75, 76, and 77.

Again, she still works full-time, which I understand is no exception (although it should've been, if you ask me).

What should I advise this client to do at this point? (Other than yell at the brokerage firm that allowed her to make incorrect contributions for several years.)
 

#2
HowardS  
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Traditional or Roth? She can make Roth contributions after age 70.5 but not traditional.
Prepare to file standalone 5329's to report excess contributions to traditional IRA's for those years. :cry:
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#3
Joan TB  
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I assume that OP has been preparing TP's returns for several years. Presumably OP did not include an IRA deduction on the return? So that is something. Presumably will be one less thing to correct. If OP did take the IRA deduction - knowing her age - then the brokerage firm is not the only that needs to be yelled at.

Did TP take her RMD in those years in addition to making more contributions?
 

#4
ode923  
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Thank you, Howard and Joan.

I've been preparing the returns for the past 3 tax years, and a former colleague prepared them before that.

For the 3 years I've been preparing them: yes RMDs have been taken, and I didn't know about any IRA contributions so I certainly didn't report any (or take a deduction)!
 

#5
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Non-deductible then....hmmm, can she even make those?
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#6
HowardS  
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Should be some 5498's floating around....
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#7
mariaku  
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If the contributions were made past-age-70.5 to non-deductible Traditional IRAs, could each of them just be recharacterized into a Roth contribution for each respective year? (Assuming the taxpayer's income level allowed for a Roth contribution).

Maria U. Ku, CPA
Oakland, CA
 

#8
makbo  
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JR1 wrote:Non-deductible then....hmmm, can she even make those?

Apparently not, but it's wrapped up in a long history of legislation.

viewtopic.php?p=147206#p147206
 

#9
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Apparently not, but it's wrapped up in a long history of legislation.

Not really. Sec 219 deals with deductible contributions. It’s 408(o)(2)(B) that’s always been the problem, the ND limitation calculation:

(B)Nondeductible limit
For purposes of this paragraph—
(i)In general The term “nondeductible limit” means the excess of—
(I) the amount allowable as a deduction under section 219 (determined without regard to section 219(g)), over
(II) the amount allowable as a deduction under section 219 (determined with regard to section 219(g)).

The (B)(i)(I) part would be $0 for someone that is over age 70.5 (old law). So there is no way to get a positive number from this subtraction calculation.
 

#10
HowardS  
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If the contributions were made past-age-70.5 to non-deductible Traditional IRAs, could each of them just be recharacterized into a Roth contribution for each respective year? (Assuming the taxpayer's income level allowed for a Roth contribution).


Recharacterization must be completed by the tax filing deadline (or extended deadline).
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#11
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When you say she works full time, is she a W-2 employee or by chance is she self employed?
 

#12
philly  
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I think the excess contribution would be subject to a 6% penalty each year until corrected. Since these contributions
are non deductible IRAs where on form 5329 would you compute the penalty. Are they considered traditional IRAs and included in part III ?
Last edited by philly on 20-Jan-2020 6:06am, edited 1 time in total.
 

#13
HowardS  
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Part III. 6% additional tax, start with the earliest year and work forward.
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#14
philly  
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So a Non deductible IRA is considered a traditional IRA on form 5329
 

#15
HowardS  
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From 5329 instructions:
Traditional IRAs. For purposes of
Form 5329, a traditional IRA is any IRA,
including a simplified employee pension
(SEP) IRA, other than a SIMPLE IRA or
Roth IRA.


Non deductible refers to the tax treatment of a traditional IRA contribution...it is not a different kind of IRA.

Also, FYI...removing the contributions will reduce the amount subject to the 6% additional tax. RMD's taken and included in income will do that.
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#16
Joan TB  
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Question - if she only took the actual RMD (nothing extra) can the distributed amount count as both the removal of some of the excess contributions AND the RMD for that year?
 

#17
HowardS  
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Yes...I saw that little trick in an article several years ago but can't locate it now. I don't see why not, the distribution flows to the 5329 regardless of what it is called.
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#18
supdat  
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I had a (now deceased) client, employed by a financial institution, who was contributing to his 401(k) through his employer after age 70.5 for well over 10 years. Are the rules different for a 401(k) vs. an IRA?

Regarding the OP, I would have thought that the financial institution would be prohibited from accepting an IRA contribution if the Internal Revenue Code prohibits it due to age.
 

#19
HowardS  
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The rules are different for a 401k...you can contribute as long as you are still working regardless of age.
For 2020 and beyond the rules are now the same regarding this, the IRA has caught up.
The financial institution is typically not the gate-keeper. Fidelity's contribution form for example doesn't care.
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