Updated Wednesday, July 23, 2014 as of 2:08 PM ET
Blogs - Ask Ed Slott
Ask Ed Slott: Fix for Mistaken Excess IRA Contributions?
Sunday, February 16, 2014
Partner Insights

If my wife gets paid for helping my daughter to do spring cleaning and other housework in 2014, will my wife be allowed to contribute her salary up to $6,000 to her Roth IRA?

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.

An elderly client 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 the elderly lady did not notice. This resulted in a $40,000 IRA excess contribution. Her tax preparer (not a CPA) did not notice the error until she 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 from the IRS? This was an obvious error and it just doesn’t seem right for her to owe a 6% penalty.

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 her confusion in filling out the IRA documents. She may want to see if the bank will agree to pay for some of her IRS penalties and the taxes due on the IRA distribution due to their part in the mistake. She should also consult with a competent tax advisor because the IRA distribution is taxable to her because it exceeded the annual IRA contribution limit for the year, in addition to the 6% penalties that are due. She 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.

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 eight years, do the earnings on those transferred funds have to remain in the eight-year-old Roth for a minimum of five years before they can be withdrawn without a penalty?

No. There is only one five-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.

Have a question for Ed Slott? Please send your mailbag questions to mailbag@irahelp.com.

Read more:

(2) Comments
Financial issues are the most difficult and demand from a person having smart brain and common sense. There are different financial vehicles which people have interact with like IRA, online loans, insurance companies and so on. You need to be financial savvy to benefit with all these mechanisms.
Posted by Robert D | Wednesday, February 26 2014 at 5:09AM ET
Your wife's payment is bonafide 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. only direct lenders you need your knowledge updated related to these financial issues.
Posted by prinka s | Tuesday, April 08 2014 at 2:14PM ET
Post a Comment
You must be registered to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
2014 Summer Reading List for Advisors

Current Issue

The July Issue is now online!


Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here