Hi folks, I had recently done some digging into my Roth IRA portfolio just to monitor fund performance and sector allocation, something I regretfully have ignored for the past 14 years I have been invested in a Roth. My portfolio is all mutual funds, mostly active large cap stock funds from a few different providers.

I had noticed that I accidentally double contributed for the tax year 2004. I contributed $3,000 (the max allowed for that year) in April 2004 for the 2004 tax year to one fund, but I had also contributed $3,000 the following year in another fund, also for the 2004 tax year.

I understand this could be considered an excess contribution, and I will be socked with a 6% penalty for each year the excess is left in the funds. Is there any way I could ask the fund custodian for one of the funds to change the tax year to say, 2003? I noticed that I had contributed to a Roth every year EXCEPT 2003, so it looks like that is the reason for my error.

Or, could I instead just ignore my mistake and pretend nothing happened? How would the IRS know about this, would they even pick up on the duplicate 2004 contributions when I take distributions when I finally retire?

I'm ok with paying the penalty, but I am hoping that I could just simply explain my error to the fund custodian, have them make a change to the tax year and be done with it.

The IRS will know the same way you know, through form 5498. In fact, your first step should be to verify your form 5498's going all the way back.

You cannot allocate this to another year at this point. But, my guess is that one of 2 things happened. 1) you actually made the April 04 contribution to the 2003 tax year or 2) somewhere along the way you didn't contribute the max and the problem worked itself out.

Your 5498's will tell you the story. You should be keeping them anyway as this is the best way to prove what you basis is in your Roth account(s).

I would correct the problem if there is one.

Hi, I have kept the 5498s, as well as a copies of the documents I filled out along with an image of my paper checks, for all my ROTH IRA contributions in the past. Good thing I did! For just about every year, my practice was to contribute the max amount in one installment for the prior tax year. So, during April 2001, I would have contributed for the 2000 tax year, during April 2002, for tax year 2001, etc etc.

I'm sorry to say that I found the culprit. In April 2004, when I filled out the application I neglected to check the box instructing the custodian to apply my $3,000 to the 2003 tax year. So this is totally my fault. I intend on calling the fund custodian to see what my options are for correcting this, but I have a feeling that I will have to pay a penalty to the IRS. I'm glad I caught this now, I'd hate to think what the total penalty would be if I never found this mistake. I'm sure it's a common occurrence, but it doesn't make me feel any better

This leads to one more question. I am assuming I will need to withdraw the excess amount, which is the $3,000 plus the earnings attributed to that principal. Plus, I would have to pay a 6% penalty for each of the years that those funds remained in the Roth. regarding the 6% penalty. Does that sound about right?

Or, could I ask them to re characterize the $3,000 in the Roth as a Traditional IRA, and avoid paying penalties altogether?

One more thing, why didn't the IRS catch this, as they were furnished with the 5498s by the plan providers?

Thanks so much for your reply!

If you don't contribute completely one year, the excess contribution "works itself out" until it goes away.

My suggestion would be post on farimark.com and look for a response from Alan S.

http://fairmark.com/forum/read.php?2,64403

Looks like you will need the 1040x for each year....

Changing from roth to Trad will not help, as your total contribution to ANY IRA is what matters. Did your custodian show 2 years' worth of contributions on your '04 5498?

I have pulled out my 1040s for 2003 and 2004, to reconcile with what I see on my 5498s and the IRA adoption agreements in finding if anything is amiss. It turns out that I actually had an entry in my 2003 1040 IRA worksheet for the $3,000 in the first fund (Columbia Acorn Fund). This is the fund I contributed to in April 2004 that I mistakenly did not check the "prior year contribution" box, and as a result Columbia Funds then assigned the $3,000 to the 2004 tax year. For the 2004 1040, the IRA worksheet also had a $3,000 entry, for the "duplicate" second fund (Dodge and Cox International Fund). So, my original intent to contribute to the prior year with each yearly Roth contribution was intact, and I can now clearly see where I messed things up.

In the IRS's eyes, my 1040s show no double contribution for 2004, whereas, the 5498s from both funds each show a 2004 contribution. Before I pulled out my 2003 tax forms, I was under the impression that the second fund (Dodge and Cox) was the errant fund with excess funds, but now it appears that I may have to pull out the excess from the first fund, Columbia. I guess what I am trying to determine is, which form (1040 or 5498) would the IRS use as the deciding document to choose which of the two funds to remove the excess contribution and attributable earnings from?

Looking back, I wish I kept a detailed record of when and for what tax year I made my Roth contributions, but, I'm glad I caught it now rather than later, if ever. I thank you again for your assistance!

First off, this sounds like a complicated tax situation and you might want to consult a tax expert. That said...

The general rule is that all IRA's (Roth or traditional) are considered one large pot. So you didn't contribute $3000 too much to one or the other IRA or fund. Rather, you contributed $3000 total in that year to your IRAs. I don't know if that means your earnings on the amount is prorated between the two funds, or if you get to choose the one that did worse in the last 9 years.

I thought you might get away with this due to the statute of limitations, but according to this http://mastertype.blogspot.com/2011/07/limitations-period-remains-open-if.html, Form 5329 is a separate tax return, and the statute of limitations doesn't start running down until one files a return.

I don't know why this didn't occur to me sooner, but as my 1040s for 2003 and 2004 indicate, there really is no excess contribution at all, which is what this situation boils down to, the possibility of penalties and taxes on "ill gotten" gains. $3,000 was deposited in April 2004 in one Roth IRA, and started generating gains. $3,000 was deposited in a different Roth IRA the next year in April 2005 and generated a return.

Despite having two 5498s showing a 2004 contribution because of a clerical error on my part, this cannot possibly be interpreted as an excess contribution can it?

Why don't you just call them and ask what you did, if you can't figure it out through paperwork?

If you contributed in April 2004 and April 2005, you need to find out whether your contribution went to the current year or the previous year. You probably contributed in 2004 for the 2003 year, and in 2005 for the 2004 year. However, if you can't figure it out, or don't remember, it's a two second phone call.

I also have a feeling that if you haven't heard from the tax people, you're probably ok, but I know all about government efficiency, so don't take my word for it.

Sorry, that's not how it works. It can and would (if the IRS noticed) be interpreted as overcontributing for 2004.

If I were you, I would verify what the other posters said about unused contributions in later years "soaking up" the excess from 2004. Were it true, I would skip contributing as soon as possible, to limit the maximum size of the problem. Then I would just wait for the IRS to notice and send me a bill. If they never did I wouldn't worry about it.

>>If they never did I wouldn't worry about it.>>

That is not an argument the IRS will accept if they catch you, and they very well might. IRS penalties are stiff and punitive, so delaying your reporting will only make your situation worse.

Talk to a tax professional (if the IRS comes back to you it's good to have someone on your side), report the mis-characterization, and pay whatever penalty (hopefully little or none) ASAP. Get it behind you, and you can go forward, remembering to always check that little box, LOL.

Good luck, and pls report back what happens.

The penalty would be 6% * $3000 * 9 (years) = $1,620. Who can figure it with the juice, er I mean interest and penalties, though if you are proactive the IRS might waive penalties.

According to that one case study I found, there is no statute of limitations on excess IRA contributions, though in that case it was a result of a fraudulent transaction. Still, it's been 9 years, are they really trolling returns that old looking for mistakes? It just seems so unlikely.

Here's another (pseudo) forum thread on someone with a similar situation: http://fairmark.com/forum/read.php?2,66455

Nevertheless, this is almost certainly one of those things you should talk to a pro about, rather than trying to get advice from an anonymous internet forum.

I'm going to bring this up with my parent's tax preparer when he does their 2012 taxes. I have been doing my own simple taxes myself with Turbotax the past few years, but he was the professional in charge of the returns in question here, so I trust he can offer the right advice.

I'm hoping that even if he suggests I fess up to the IRS, that they are lenient. I mean, come on, I'm just a small fry who made a simple mistake, and theoretically, there IS NO excess contribution to speak of.

Anyhow, I am thankful for the responses I have recieved here!