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Author: SABOB Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120826  
Subject: Rollover IRA Date: 11/12/2013 9:54 AM
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Through a mistake, I deposited 2012 IRA contribution ($6,000) to my Vanguard IRA account which is a Rollover from a US Government TSP. IRS has disallowed, naturally, and I am paying the tax due.

My question: is there anything else I should be thinking about? I realize I might have to pay tax again on withdrawal, many years in the future. Or, can I keep proof of tax payment and avoid doing that?

Any help would be appreciated.
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119491 of 120826
Subject: Re: Rollover IRA Date: 11/12/2013 10:03 AM
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Through a mistake, I deposited 2012 IRA contribution ($6,000) to my Vanguard IRA account which is a Rollover from a US Government TSP. IRS has disallowed, naturally, and I am paying the tax due.

OK, we need to back up and find out what the problem is, because there's absolutely nothing wrong with making an IRA contribution to a "rollover" IRA, which is nothing other than a plain old traditional IRA.

I can think of two possibilities that would produce a bill:

1. You (and your spouse, if filing a joint return) didn't have $6,000 of earned income, resulting in an excess contribution and a $360 penalty.

2. You took a deduction for the contribution which wasn't allowed because of the combination of AGI and coverage by a retirement plan.

I would suspect #1 since it seems too early in the underreported cycle for them to be catching #2, but they could be making progress on speeding up that cycle.

So throw out your assumptions and re-read the paperwork, then get back to us.

Phil
Rule Your Retirement Home Fool

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Author: SABOB Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119493 of 120826
Subject: Re: Rollover IRA Date: 11/12/2013 4:32 PM
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Thanks for quick response.

I sent IRS Vanguard statement with the two $3000 contributions circled. Here is a direct quote from their response:

"The statement that you provided from Vanguard shows the two $3000 IRA contributions were actually rollover contributions. Because rollover contributions are not deductible, you cannot deduct this amount on your return."

#1 on your list does not apply. However, AGI was $88,000 and I receive a US Government pension. But, they mentioned neither.

Does this help?

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119494 of 120826
Subject: Re: Rollover IRA Date: 11/12/2013 5:02 PM
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I sent IRS Vanguard statement with the two $3000 contributions circled.

Why? The first indication that there was a problem is where I need you to back up to.

Phil
Rule Your Retirement Home Fool

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119495 of 120826
Subject: Re: Rollover IRA Date: 11/12/2013 5:17 PM
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A few more things which will save us some time.

1. When did you stop contributing to the TSP? If you're FERS, when did Uncle Sam stop contributing? (Year is close enough)

2. You mentioned two $3,000 checks. Were these both for your IRA (as opposed to your spouse's)?

3. Where are you in the process with the IRS? Have you signed an agreement? Sent the money?

4. What did Vanguard show for 2012 activity on Form 5498?

5. How did you reflect the $6,000 on your 2012 1040?

6. What year(s) did you do the rollover from TSP to Vanguard. How was this reported on your 1040(s)?

7. I just want to make sure by asking the same question as before a different way. Is there are least $6,000 on line 7 of your 2012 1040?

Phil
Rule Your Retirement Home Fool

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119499 of 120826
Subject: Re: Rollover IRA Date: 11/12/2013 9:43 PM
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I suspect the confusion here is that you didn't realize that a rollover is not a deductible contribution to your traditional IRA. The IRS generally refers to all deposits to your IRA as "contributions". A direct contribution is money you contribute that you may/may not deduct on your form 1040. A "rollover" contribution is just another way of saying that you transferred a retirement plan account balance from your employer's retirement plan to your TIRA. This will not count as a deductible contribution, as these dollars are already pretax. The other difference between these two forms of "contributions" is that rollovers do not require that you have earned income and you can do this at any age, while direct contributions do require that you (or your spouse) have earned income of at least the direct contribution amount, but with a TIRA you can only directly contribute up until the year you reach age 70.5.

So, assuming this is for 2012, look at your form 1040, line 32. Do you show an amount here? If so and this represents the dollar amount of the rollover, you did it wrong and you'll have to file an amended return to correct it or, if the IRS corrected it for you, pay the back tax they've calculated, which I'm sure will also include a penalty.

BruceM

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119501 of 120826
Subject: Re: Rollover IRA Date: 11/13/2013 12:20 AM
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I suspect the confusion here is that you didn't realize that a rollover is not a deductible contribution to your traditional IRA.

You are assuming that the OP intended these to be rollover contributions and tried to deduct them. (And that appears to be the IRS position here as well.)

My assumption is that the OP intended these to be normal contributions (who rolls over exactly $3000 twice??) and somehow the custodian thought they were rollover contributions and reported them to the IRS accordingly.

A key piece that's missing here goes back to one bit of information Phil asked: What was on the Form 5498 that the custodian prepared for this year.

Plus one bit of information no one has asked yet: What did the OP intend with these contributions? A rollover? Or a regular contribution?

--Peter

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Author: SABOB Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119502 of 120826
Subject: Re: Rollover IRA Date: 11/13/2013 8:36 AM
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In looking up answers to questions posed, I found the error. I inadvertently made the contributions from remaining Prime Money Market Fund contained in the rollover IRA rather from the Money Market Fund in my taxable Vanguard account. So, I was essentially just moving funds around within the rollover.

First tax issue in 50 years, so maybe it is time to have someone else prepare!

I really do appreciate the help as it led me to the answer.

Am wondering about the question about Line 7 on 1040. It was my understanding, reinforced by looking at some IRS publications last night, that net proceeds from a business count as "earned income" and that an IRA contribution can be made regardless of wages, etc. on Line 7. Why would there need to be more than $6,000 on Line 7? I had about $40,000 of such precedes.

If someone can address that issue, I'll go away until next tax season!

Thanks again for the help.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119504 of 120826
Subject: Re: Rollover IRA Date: 11/13/2013 8:49 AM
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I inadvertently made the contributions from remaining Prime Money Market Fund contained in the rollover IRA rather from the Money Market Fund in my taxable Vanguard account.

Mystery solved. Glad we could help.

Am wondering about the question about Line 7 on 1040. It was my understanding, reinforced by looking at some IRS publications last night, that net proceeds from a business count as "earned income" and that an IRA contribution can be made regardless of wages, etc. on Line 7. Why would there need to be more than $6,000 on Line 7? I had about $40,000 of such precedes.

You are correct. Net income from self-employment is also a valid basis for IRA contributions. I incorrectly made the line 7 assumption because elsewhere on the boards I'd gotten the impression that both you and your spouse were fully retired. Self-employment income never entered my mind. Sorry about the confusion.

Phil
Rule Your Retirement Home Fool

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Author: SABOB Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119509 of 120826
Subject: Re: Rollover IRA Date: 11/13/2013 10:12 PM
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Well, I could have been clearer in what I wrote.

Thanks to all.

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