Level 3

Question

Is there a 'reasonable cause' exception to avoid the add'l tax on excess Roth IRA contributions?

Forum|Forum|5 years ago
April 16, 2021
14 replies
47 views

My first year with these clients.

Clients live with each other, but 1040 filing status has been 'married, filing separately' for decades.

One spouse has been funding a Roth IRA since 2011. However, clients' financial adviser did not financially advise clients to avoid filing separately. No other tax preparer (since 2011, at least) has ever advised clients to avoid filing separately.

Spouse has now taken corrective distributions for 2020 and 2021 Roth IRA contributions. In addition, all future scheduled Roth IRA contributions have been stopped. However, there still remains the small issue of about 9 years of excess Roth IRA contributions for the years 2011 through 2019. I haven't prepared the 5329's for those years, but I expect the penalty to be in excess of $25,000 (before interest).

I am hoping that there is a reasonable cause exception to the penalties to help these nice folks out, but I don't see where the 5329, Part IV has the space to list an exception to the penalty. Does anyone have any options to offer, other than "Make your check payable to U.S. Treasury"?

Many thanks!!!

ProSeries Professional

This topic has been closed for replies.

sjrcpa

Level 15

The term you mean is waiver. You can request a waiver. There should be a place to enter a reason.

When people forgot to take RMDs, the waiver request was always granted.

I have no experience with this situation. What's going to be your reason? I don't think "No one ever told me to avoid MFS" is ~~not~~ going to cut it. Is this a financial advisor's responsibility? They are not supposed to give tax advice, are they? And why does this matter? Income limitations?

The more I know the more I don’t know.

D

Dave WAuthor

Level 3

Thank you for taking the time to reply. Because the taxpayers filed separately each year in question, their annual Roth IRA contributions phase out range was $0 to $10,000. Not that it really matters, because even if they had filed jointly, their combined AGI exceeded Roth IRA max for all years in question.

I realize that IRS may chuckle at my "dumb Financial Advisor" waiver request (thank you for correcting me), but that is all I have to offer my clients. My problem is that I don't see how to physically enter the request on the 5329.

BobKamman

Level 15

As a general rule, people who put their money in Roth IRA's are dumb. (There are some exceptions.) The only people who are dumber, are the financial advisers who recommend Roth IRA's.

Client: "I have $6,000 to invest. Can you help me?"

FA: "I'm not good at investments. Pay $2,000 of it in taxes and I'll try to figure out something to do with the $4,000 that's left."

But that doesn't solve your problem here. But neither does asking for a waiver. Is that even available? I thought it applies only to retirement plans with RMD's. You seem to agree. So we're talking about the 6% penalty, and not the 50% penalty, right? But the 6% is assessed each year that there is an excess accumulation.

When does the statute expire on those 5329 taxes, when a 1040 was filed for the year? Can IRS assess 5329 taxes for 2011, or can they only go back to 2018 now?

I would tell the client to withdraw all contributions since 2011, and their earnings, from the account now. Then, pay tax on the earnings on the 2021 return. The client may be obligated to file some amended returns but I'm only obligated to tell the client about that and offer an opinion on whether IRS will ask for them.

Might be cheaper for him to file for an annulment.

J

jeffmcpa2010

Level 10

Agree with Bob.🤑

Paying $1500 tax now to (for a 30 year old) avoid paying tax on $ 200,000 (and much more eventually as you are not subject to RMD's) that would be accumulated by age 70, at reasonable realistic investment rates is totally foolish.

(Now where is that **bleep** sarcasm font)

qbteachmt

Level 15

I agree with Jeff, but the date would be 72, now. Considering all the likely growth for a side-by-side comparison for the same investments in Trad vs Roth (assuming you did this right and invested well), it sure seems a shame to pay income taxes on that Trad IRA as you take your forced RMDs. But, hey, someone has to pay to keep the country operating. Just not me.

Don't yell at us; we're volunteers

George4Tacks

Level 15

If there was excess Roth IRA contributions in those 9 years, penalty is due on all of them UNTIL THE CONTRIBUTION IS WITHDRAWN. Fixing 2020 and 2021 may not be enough.

Consider amending to MFJ for open years?

Answers are easy. Questions are hard!

D

Dave WAuthor

Level 3

George, thank you for taking the time to reply. Amending open years is not a viable option. Taxpayers' combined AGI in open years exceeded annual Roth IRA contribution cap for MFJ.

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