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Discussion:Roth IRA and penalty tax

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Discussion Forum Index --> Advanced Tax Questions --> Roth IRA and penalty tax


Discussion Forum Index --> Tax Questions --> Roth IRA and penalty tax

Moon101 (talk|edits) said:

28 February 2014
Situation: Client contributed $5,000 to Roth IRA on 08/15/13. On 11/21/13 client changed their mind and recharacterized the Roth to a Traditional IRA. The Roth had a fair market value of $5,151 at time of transfer. On 12/15/13 client contributed $500 to traditional IRA.

Question: Does the client have to pay excise tax on $151?

EZTAX (talk|edits) said:

28 February 2014
No. As long as it was taken out by 4/15/14 (or 10/15 if filed on time I believe) then no excise tax due.

Moon101 (talk|edits) said:

28 February 2014
I don't think they are going to take out the $151. The excise tax on that is $9, and they are okay with that.

With the recharacterizing of a Roth with some income produced is the confusing part.

Nightsnorkeler (talk|edits) said:

28 February 2014
There is no excess contribution. Client is deemed to have contributed a total of $5,500 to the traditional IRA. The $151 of earnings in the Roth is deemed to have been earned in the traditional IRA.

Moon101 (talk|edits) said:

28 February 2014
Ok. I got two different answers here.

Is this up for debate?

Nightsnorkeler (talk|edits) said:

28 February 2014
Instructions for Form 8606 (2013) - Internal Revenue Service

Reporting recharacterizations. Any recharacterized conversion or Roth IRA rollover from a qualified retirement plan will be treated as though the conversion or rollover had not occurred. Any recharacterized contribution will be treated as having been originally contributed to the second IRA, not the first IRA. The amount transferred must include related earnings or be reduced by any loss. In most cases, the related earnings that you must transfer are figured by your IRA trustee or custodian. If you need to figure the related earnings, see How Do You Recharacterize a Contribution? in chapter 1 of Pub. 590. Any earnings or loss that occurred in the first IRA will be treated as having occurred in the second IRA.

Moon101 (talk|edits) said:

28 February 2014
I will pass on the debate. After doing more research I find that Nightsnorkler is right.

EZTAX (talk|edits) said:

2 March 2014
Agree with snorkeler - I read it to fast and was wrong  :(

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