March 2014: IRA Contribution Changes
Contributing to traditional and Roth IRAs can be a great way to supplement your retirement savings; however, sometimes those contributions may need to be changed. You may
discover that your contributions put you over your annual limit when you file your tax return, or you may decide to change a traditional IRA contribution to a Roth, or vice
versa. Fortunately there are ways to correct your contributions with the following options.
Return of IRA Contributions
If you contribute more to an IRA than you are eligible to contribute for a particular tax year, you will need to withdraw the funds by requesting a removal of excess. The
contribution plus any attributable earnings will need to be removed by the tax return due date for the year the contribution was made, including extensions. If removed by the
deadline, the contributions are treated as if they were never made. Excess contributions remaining in the IRA will incur a 6% tax penalty for each year the funds remain in the
If you make a contribution to a traditional or Roth IRA, you may be able to switch the contribution to the other IRA type without penalty. You are also allowed to "undo" a conversion made to a Roth IRA. These transactions are called recharacterizations. Recharacterized contributions are treated as if they were originally made to the second IRA,
and conversions are treated as if they never occurred. Recharacterizations must be moved directly from trustee-to-trustee and must be completed by your tax return due date for the year the contribution or conversion was made, including extensions.
Return of IRA contributions and recharacterizations are reported by financial institutions on IRS Form 1099-R. These transactions must also be reported on your tax return. Please refer to the instructions for IRS Form 8606 and IRS Publication 590 for more information about how to report the transactions on your federal tax return.
In order to request a return of your contribution or a recharacterization, please stop by your local branch and complete an IRA Withdrawal Request form.
Previous Investing Basics:
- February 2014: Take advantage of some IRA tax benefits.
- December 2013: Are you paying the price for investment expenses?
- November 2013: Saving for retirement in an individual retirement account
(IRA) or other retirement account prepares you for a better financial future.
- October 2013: For members seeking income that is exempt from federal
income taxes, CUIS has expanded recommended municipal bond funds.
- May 2013: Too Much Cash?
- April 2013: When naming beneficiaries for your IRA at SECU, you have
the option to choose a per stirpes distribution method.