Please note: We provide this for informational purposes only. We do not provide tax advice.
IRA contributions we receive are designated as current year IRA contributions by default. If your client sends us a contribution check between January 1 and December 31 your client can designate those contributions as prior year contributions by following the steps below.
If your client wishes to make a prior year contribution, please do the following:
You can open an IRA for a client for the prior year from January 1 through April 15.
You can convert your client’s Traditional IRA to a Roth IRA by completing an IRA Distribution and Recharacterization Form When we process your client’s request we will convert the designated Traditional IRA to a Roth IRA.
To open a Beneficiary IRA:
Beneficiary IRAs are only allowed to hold IRA funds/assets inherited from a deceased person’s IRA or a retirement account on which your client is listed as a beneficiary.
The following online process may be used to request the following types of IRA distributions be made directly to a client: Normal, Premature Without Exception and Beneficiary IRA death distributions. To request a distribution for your client from an IRA:
If your client is under 59½ they may be subject to IRS penalties for early withdrawal.
A recharacterization occurs when your client contributes or converts funds into one IRA account type (Roth for example) and later wished to change the contribution or conversion to another IRA account type.
An IRA recharacterization can apply to the following:
The following are common reasons why a client may want to recharacterize an IRA contribution:
Recharacterizations can currently only be submitted to us using a paper form. To recharacterize an IRA contribution or conversion, please complete the IRA Distribution and Recharacterization Form and choose the recharacterization option under Part 2: Reason for Withdrawal. To submit your client’s recharacterization, sign and email/ mail/ fax the IRA Distribution and Recharacterization Form to us.
Recharacterizations for prior year contributions or conversions must be completed by the tax filing deadline of the current year Please seek advice from a tax professional before you or your client decides to recharacterize his IRA contributions or conversions.
IRA owners may request a full or partial recharacterization of a contribution or conversion by completing our IRA Distribution and Recharacterization Form.
An excess contribution is any amount contributed to your client’s IRA that is greater than his annual maximum allowable contribution limit. Please review the IRS IRA Contribution Limits for more information. Excess contributions can also occur for IRA holders age 70½ and older, Beneficiary IRA holders who make contributions to their Beneficiary IRA, because of invalid rollovers or, due to failed Roth Conversions. Please see IRS Publication 590 for more detailed information.
Penalties are assessed if excess contributions are not withdrawn by the tax filing due date. Your client is subject to a 6% tax and must pay the 6% tax each year on excess amounts that remain in their IRA.
To correct an excess IRA contribution for your client, you must withdraw the excess amount and any earnings attributable to the excess amount from the IRA by the owner’s tax filing deadline. Earnings attributable to the excess contribution amount may be subject to a 10% early withdrawal penalty if your client is under 59½ years old.
To withdraw excess contributions, complete the IRA Distribution and Recharacterization Form. You will need the following information to fill out the form:
For additional information on how to correct excess contributions, please refer to IRS Publication 590: Individual Retirement Arrangements (IRA).
The formula for calculating NIA is as follows:
NIA = (Excess Contribution × Total Earnings)/Adjusted Opening Balance
In some cases, this formula can result in a negative amount. When that happens, the loss is attributed to the excess contribution. Earnings attributable may be subject to a 10% early withdrawal penalty.
Excess contribution distributions are reported on the Form 1099-R. The form will reflect the amount of the withdrawal and the proper IRS codes needed to indicate that the excess distribution(s) were removed.
An excess contribution distribution can take place at any time, even after your client’s tax filing due date. In this case, the Net Income Attributable (NIA) cannot be withdrawn and your client will owe the 6% (or then applicable amount) penalty for each year that the excess contribution(s) remain in his account.