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IRAs

Please note: We provide this for informational purposes only. We do not provide tax advice.

To which year do my client’s IRA contributions apply?

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:

  • When contributing by check, please have your client write the tax year to which the contribution applies on the memo line. If they do not write anything in the memo line, the check amount will be applied as a current year contribution. Envelopes containing a prior year contribution must be postmarked by April 15.
  • When contributing by electronic deposit (EFT, wire, or bill pay) please have your client send us an email when they send their contribution referencing the date your client made the electronic deposit, the dollar amount, their account number with us and instructions that the contribution should apply to the prior tax year.

Can I open an IRA for the prior year in the current year for a client?

You can open an IRA for a client for the prior year from January 1 through April 15.

Can I convert a client’s Traditional IRA to a Roth IRA?

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.

How do I open a Beneficiary IRA for my client?

To open a Beneficiary IRA:

  1. Open a Rollover IRA or Roth IRA for your client through our online account opening path
  2. Then submit a completed and signed Beneficiary IRA Amendment Form.

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.

How do I request a check or wire distribution for my client from an IRA?

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:

  1. Go to the client’s accounts page
  2. In the Actions menu next to the account, select Transfer Money
  3. Under Remove Money from this Account select Withdrawal Request
  4. Follow the instructions provided throughout the Withdrawal Request process to complete the request

If your client is under 59½ they may be subject to IRS penalties for early withdrawal.

What is a recharacterization?

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:

  1. If your client contributed money to his Traditional IRA, he can recharacterize the contribution so that the funds count toward a Roth IRA contribution for the same tax year.
  2. If your client contributed money to a Roth IRA, he can recharacterize the contribution so that the funds count instead toward a Traditional IRA contribution for the same tax year.
  3. If your client converted a Traditional IRA to a Roth IRA, he can recharacterize the conversion and put the funds back into a Traditional IRA.

Why might my client want to recharacterize an IRA contribution?

The following are common reasons why a client may want to recharacterize an IRA contribution:

  • Contribution Mistakes: Your client might have made contributions for which he is not eligible. Recharacterizing the contribution allows your client to correct the mistake and avoid undesired tax consequences.
  • Additional Tax Deductions: If your client contributes to a Traditional IRA and later find out that it’s not a tax-deductible contribution, he can recharacterize the contribution and make it instead for a Roth IRA. Likewise, if your client contributes to a Roth IRA and later find out that he could have claimed a deduction for a contribution to a Traditional IRA for that tax year, he may choose to recharacterize the contribution to one made to a Traditional IRA.
  • Higher Tax Bracket: If your client converts a Traditional IRA to a Roth IRA, he will have to pay taxes on the amount contributed to the Roth IRA. If your client discovers that the conversion results in him being in a higher tax bracket, your client might wish to recharacterize the IRA conversion. Using this approach the IRA will effectively remain a Traditional IRA and the former conversion will not affect your client’s tax bracket.
  • Poor Investment Performance: If your client converts a Traditional IRA to a Roth IRA, he will have to pay taxes on the amount converted to the Roth IRA even if the value of the Roth IRA declines. For example, your client converts $50,000 to a Roth IRA and the value of the account falls to $25,000. he would still owe taxes on $50,000. To avoid this situation, your client can recharacterize the $50,000 conversion reverting the balances to a Traditional IRA balance not subject to the taxes.

How do I recharacterize my client’s IRA contribution/conversion?

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.

What is the deadline for recharacterizations?

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.

Can my client make a partial recharacterization?

IRA owners may request a full or partial recharacterization of a contribution or conversion by completing our IRA Distribution and Recharacterization Form.

What is an excess contribution?

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.

Are penalties assessed if excess contributions are not removed?

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.

How do I correct my client’s excess IRA contributions?

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:

  • The year in which the contribution was actually made
  • The tax year the contribution was intended for
  • The excess amount being removed
  • The net income (or loss) that is attributable

For additional information on how to correct excess contributions, please refer to IRS Publication 590: Individual Retirement Arrangements (IRA).

IMPORTANT: You must include your client’s Net Income Attributable (NIA or earnings attributable) in his gross income. The NIA should be reported on your client’s tax return for the year in which the excess contribution was made. The question below goes over the Net Income Attributable formula for your calculation.

How is Net Income Attributable (NIA) calculated?

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.

How is an excess contribution distribution reported?

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.

What if my client’s excess contribution is withdrawn after the tax filing due date?

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.

For more information and contribution limits please refer to Publication 590 at www.irs.gov