In 1998, I had a miserable year. I had NEGATIVE income. But early in 1998, before I knew how lousy my year would be, I opened a Roth IRA at my bank and contributed $2000. (I'm single.) However, through ignorance, I didn't have my bank alter the paperwork so that the contribution could be credited for tax-year 1999 instead of 1998. Don't ask me why, I just didn't. Anyway, the IRS tells me that I had until the end of my extension period for tax-year 1998 to transfer the contribution to 1999 but they say now I'm screwed and I have to file form 5329 and pay a 6% excess contribution penalty. They say now I can get the bank to fix it but of course pay the penalty. And, if I don't do it by Dec. 31, I'll end up owing another 6% penalty.

Can I try to close this Roth IRA, reopen a new one, pretend it never happened, and hope the IRS never comes calling? Is there some way I can get around paying this penalty?

Thanks,
Eric Witte
ewittemd@aol.com
717-652-5239

Even if you post an answer, PLEASE EMAIL ME DIRECTLY AS WELL at ewittemd@aol.com. Otherwise I probably will never see your answer.
Thanks....Eric

An excess contribution to an IRA has to be corrected by the due date of the return. Failure to do so results in a 6% penalty FOR EACH YEAR until the excess contribution is removed. So if you don't get it out by Friday, you'll have another 6% penalty to pay.

You "make believe it never happened" at your own risk. Not recommended.

Are you saying you have no earned income in 1998? I don't understand that if that was the case why you even thought you could have an IRA. I am going to assume that you may have had Sched C business losses, because Sched D losses are maxed at $3K.

The CPAs may correct this, but I am under the impression you can have an IRA as long as you have earned income equal or greater than the IRA amount and that AGI is not the relavent parameter. You don't normally get negative income from a payroll job. Therefore, I would assume you had some "payroll" type of earned income. Did I understand you problem correctly?

Second, if your original instructions to the bank said 1999, I think you can still get it corrected. That is, if their original posting was in error, you can get it fixed. At a minimum it might qualify for errors and ommissions coverage on the part of the bank. My understanding is that the "more friendly IRS" is not out to fry folks over correctable mistakes that involve small amounts. Buy, hey, I believe in the tooth fairy too.


[This message has been edited by John G (edited 12-27-1999).]

John's point about earned income and AGI is well taken, but I assumed that there was a loss on Schedule C and therefore no earned income.

Also, the original post mentioned that the Roth was put in in early 1998, so it could not be designated as a 1999 contribution.