With Roth IRAs, if you overcontribute to the 2007 IRA, you can reclassify the overcontribution as belonging to 2008 as long as you don't then overcontribute in 2008. At least this is what the IRS brochure for Roth IRA says. Is the same true for Simple IRA plans, and if yes then mechanically how does one move the overcontribution from the Simple IRA 2007 into the Simple IRA for 2008 on the employee's tax return?
Adjusting Simple IRA Overcontribution
Feb 05, 2008
5 Replies
You left out the part about the 6% penalty for the excess contribution.
No. See IRS Publication 525 regarding excess salary deferrals.
It raises a new question: is there any cap on excessive contributions? Reading Publication 590 it almost sounds like there is a loophole there. Someone could make an excessive contribution of $100K and they are allowed to do this as long as they pay 6% penalty on the $100K excessive contribution amount?
So reading through the Excess Contributions section in publication 525, it sounds like there are only two choices:
1) Employee gets the Simple IRA plan administrator to distribute out the 2007 excess contribution. There is no penalty on that as long as payout is prior to April filing due date in 2008. Excess contribution is then declared as income and taxed as ordinary income on the tax return? No penalty? 2) Employee fails to remove the excess distribution, and in this case they are forced to treat the excess contribution as ordinary income and in addition they will be taxed a second time when the money is later taken out as a normal or early IRA distribution.I'm inferring 2) from publication 525. The point isn't clear to me.
If the employee asks the Simple IRA plan administrator to distribute out the excess (and any interest accumulated on that excess) do they need to make any special request in how that distribution is made?
If overcontribution amount is only $2500, could the employee start a regular IRA and have the Simple IRA plan administrator transfer the overpayment directly to the regular IRA, and recharacterize it, thereby avoiding the tax until the IRA is later distributed?
It's 6% per year it stays in the account IIRC. JOE
Of course it would stay in the account. My question on the loophole is could someone deliberately overcontribute to Roth IRA, pay the 6% penalty, and leave the money in the account, taking out proceeds in 30+ years tax free. Of course they paid tax on money up front, plus the 6%. But the extra 6% up front might be a whole lot less than 10% compounded interest on the remaining amount for 30 years taken out tax free at end.
Sorry, I read this too quickly!
6% per year is plenty of deterrent. Thank you for clarifying.Join the Discussion
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