Is there a way to avoid paying taxes on a distribution from an IRA that we thought was a Roth IRA but have found was incorrectly classified as a traditional IRA?

May 01, 2019

My husband and I opened a Roth IRA in 2001. We contributed $2,000 in 2001 and $1,380 in 2002. It has grown to $12,000. Now that my husband is 59 ½, we want to take all the money out (tax free). Unfortunately, we didn't realize that the bank classified this as a traditional IRA, and they can't reclassify it to a Roth. We did not deduct the contributions on our tax returns, so the contributions are after-tax, but now we have to pay tax on the earnings. Is there any way to avoid paying taxes on the distribution? Or is it too late?

It is too late to recharacterize an intended Roth contribution from 2001 and 2002. There still may be a way to not pay tax on the original contributions by filing Form 8606, which shows your basis in your IRA. This is filed with your Form 1040.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Paul K. Rudoy, CPA, PFS, is managing partner of H2R CPA in Pittsburgh, Pa.

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