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Posted by Harlan Lunsford on May 4, 2008, 3:38 pm
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bearsfo@gmail.com wrote:
> I need some help with Roth IRAs.
>
> I checked my mother’s 2007 tax returns this week and discovered that
> she has 2 problems that she needs to correct. First, she did not take
> the Required Minimum Distribution for an IRA she had. Second, she
> converted that IRA to a Roth IRA (added to an existing Roth IRA
> account) and paid taxes on the conversion, but she ended up making
> over the $100,000 limit (not including the Roth IRA conversion income)
> due to large capital gain distributions by her mutual funds this
> year. Below is what I think she needs to do to correct the problem
> along with some questions. Please let me know if I’m missing
> something. Thanks for your help!
>
> 1) Need to recharacterize the amount converted from IRA to Roth IRA
> for 2007.
Correct
>
> (a) She needs to include earnings that were made after the
> conversion. But how does she determine that since it was mixed into
> an existing Roth IRA?
The trustee/custodian should help here.
Actually if said recharacterization had been accomplished before 4/15,
there would be no need to determine those earnings.
> (b) Does she need to file any forms saying she is recharacterizing the
> Roth amount back to an IRA?
A simple statement with the return setting forth facts and circumstances
will suffice. This will go with the 1040x as you know.
> © Does she owe any penalties?
Probably IRS will not assess them; however if they do, just bite the bullet.
>
> 2) Take the required minimum distribution for 2007.
> (a) Does she need to file some form saying she did not take the
> required minimum distribution for 2007, but is now correcting it?
> (b) Does she need to pay the 50% penalty?
If she has a really good reason for not remembering to to it, just file
the form 5329, page 2, and follow instructions for not paying the 50%.
Formerly in olden times, one had to pay the penalty and then write a
letter, or rather a plea for mercy, asking for a refund. But now it is
simply accomplished with form 5329 without having to first send in the
money.
This is the case certainly with a timely filed return, and given the
facts and circumstances, I feel sure that IRS won't balk or question the
treatment.
(But don't sue me if they don't! lol)
> 3) Amend 2007 tax return.
Right.
ChEAr$,
Harlan Lunsford, EA n LA
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