Originally Posted by arnoldabrown
#1;In 2010, I closed and transferred 27K from a savings acct., at one bank. After doing this I went to a new bank and opened an IRA Acct., with this same money. I got confused as I had another, smaller IRA that I rolled over into the new bank as well, but that was a real IRA money.
When the 27K IRA matured in 2013 I took a look at the my paperwork and discovered my error from 2010. I called the bank and told them and they said to withdraw it or I would be liable for a 6% tax of some kind. I did this and received a #1099 for the 27K in Jan 2013.
First, I never took any IRA Deductions for this money on my 1040A so there was no advantage to doing what I did, since this was money I had already paid taxes on.
I have been taking distributions on a 403B and another small IRA (it really is one) as well as the account mentioned above (not an IRA) since 2012 when I turned 70 1/2. My only income is Social Security ($650.00) and bank interest so I have not had any tax liability since I working several years ago.
What is the best way to handle my mistake, or is there a way? I have not filed Form #8606 nor Form 5329 - Part III (which I read about) because I can't understand if there is a way correct my error or should I just pay the tax on the closed account?
#2: Is there a 'waiver' I could file? How about a lump sum distribution? .
#1:I guess it depends.One of the advantages of opening an IRA is the tax savings you can receive. But those tax savings do not necessarily have to happen up front. If you are not eligible for a deductible IRA or do not want to use one, you can still invest your after-tax dollars and get a tax break in the long run. The IRS restricts how much each person can contribute. If you contribute too much money, you must pay a 6 percent tax penalty on the money if you fail to withdraw it before your income tax due date. When you take the withdrawal to correct your contributions, you must also withdraw any earnings on the excess contribution.I guess you need to calculate the excess amount of your contribution by subtracting your contribution limit from your contribution amount. For example, if your contribution limit equals $6K and you contributed $9K, you would subtract $9K from $6K to find your excess contribution to be $3K. and you need to contact your financial institution to find out how much interest or other earnings your excess contribution generated while it remained in your IRA. You will also have to pay a 10 percent early withdrawal penalty on the withdrawal. Form 5329 is filed when an individual with a retirement plan needs to indicate whether he or she owes the IRS the 10% early-distribution or other penalty; an individual who receives a distribution from his or her retirement account before reaching age 59.5 owes the IRS an early-distribution penalty additional tax of 10% of the distributed amount, unless an exception applies. Generally, the issuer ,the IRA ,will indicate on Form 1099-R used for qualified plans and IRAs whether the distributed amount is exempt from the early-distribution penalty. If an exception to the early-distribution penalty applies, the issuer should note it in Box 7 of Form 1099-R.You need to file Form 5329: if you receive a distribution you’re your retirement plan that meets an exception to the early distribution penalty, but the exception is not indicated on Form 1099-R. youmust complete Part l of Form 5329. You receive a distribution from your retirement account that does not meet any exception to the penalty. However, the issuer mistakenly indicates that an exception applies. You must complete Part l of Form 5329.
You should file Form 8606 to report your basis in a non-deductible individual retirement account. File one Form 8606 for each year that you made non-deductible contributions. This will establish your basis in the IRA. You would then be eligible either to convert your non-deductible IRAs into Roth IRAs, or you could begin taking distributions from the non-deductible IRAs. You should work with a tax professional to help you figure out if converting to another retirement plan would make. The penalty for filing Form 8606 late is $50. However, the IRS sometimes waives this penalty if you can show reasonable cause for why the forms are filed late. You have additional options for your IRA contributions for 2010 through 2013. You can treat those as deductible or non-deductible. To claim the deduction, you would need to file an amended tax return using Form 1040X. You can only do this within 3 years from the original filing deadline. So if you wanted to claim an IRA deduction for tax year 2010, you will need to file that amendment by April 17, 2014. (This is the last day to claim a tax refund for the 2010 tax year.). Although Form 8606 is normally submitted with a timely filed Form 1040, the IRS will process a late-filed Form 8606 - even one that is filed after the normal three-year statute of limitations for claiming a refund has expired. The Form 8606 can be submitted without a Form 1040 or Form 1040X.
#2:An individual may contribute the lesser of 100% of eligible compensation or $5k to $6k if at least age 50 by year-end) to an IRA . Contributions in excess of these amounts must be removed from the account by tax-filing deadline (plus extensions) for IRAs. An amount not removed by this deadline may be subject to a 6% excise tax for each year the excess amount remains in the account. The applicable section of Form 5329 is determined by the type of account: for Traditional IRAs, Part 3 should be completed; The 6% excise tax may also apply to ineligible rollovers, ineligible transfers unless they are corrected in a timely manner.