Help Needed: Traditional IRA over contribution that was bank's fault

I currently have a situation in which I apparently over contributed in 2007 to Traditional IRA and would appreciate any help in interpreting this matter.

This is what happened:

I went to my bank to contribute to my 2007 IRA late March 2008; I planned on contributing $4000, the maximum allowed. But the bank staff told me that since I turned 50 earlier that month, I can contribute up to $5000, since it's calculated by the tax year which doesn't end until April 15th. I didn't believe him and asked him if he was sure. He said yes, then he even called and confirmed with his manager, and the manager said yes too. Since banks are not allowed to take more than the maximum allowed for IRA contribution, I thought that they had to be right and agreed to put $5000 in my IRA.

As I was doing my taxes later, I became uncertain again, and went to their bank branch again to make sure with another one of their staff. She read over the paperwork for that newly created IRA account, and said that yes it should be fine, and that I am allowed to do $5000 for 2007.

So, I went ahead, filed my taxes, and received my refund check from IRS in July. So I thought everything was fine and all.

Then just yesterday (5 months after), I received a letter from that bank saying that their record shows that I have over contributed and that I should call them to see what can be done to resolve it.

I now don't really know what to do. I had already taken deduction for it on my 2007 tax return and moved the money over to another bank in an IRA annuity that is fixed for 5 years. I feel that the bank should take responsibility since they broke the tax code Section 408 (a)(1) by allowing me (not to mention they were the ones who suggested to me) to put in, according to their accounting department letter, more money than I should have.

If I really wasn’t supposed to put in that extra $1000, what would I need to do if I want to roll it over onto 2008’s contribution? (I know I would owe 6% penalty tax, but anything else to be done about the additional deduction I took on 2007’s tax return? And what about 2008’s return when it’s time to file it?) Would the bank be liable for what happened and maybe help me pay charges incurred because of their mistake or will they be clear of all responsibilities? Thanks in advance!

Hym,

I am guessing you do your own taxes.
Regarless of who does your taxes, when you sign the tax return, you are saying it is a good return.

You followed the advice from Bank#1 and overcontributed.
Go talk with Bank#1 and get their advice. They want to help get this fixed.

Now you have your IRA at Bank #2. You need to go to Bank#2 and tell them you over contributed for 2007. They are likely to suggest you move the $1,000 plus earnings to your 2008 contribution. That would be an easy way out.

Whichever bank issued form 5498 for your IRA, will need to issue a corrected form indicating what your real contribution is for 2007, $4,000.

You will need to amend your 1040 showing the correct deduction for your IRA contribution. This may increase your tax.
Use form 1040X.

For 2008, you will receive a 1099-R showing a distribution from your IRA of the earnings. This will be reported on your 2008 return line 15a and 15b.
But if you make that part of your 2008 IRA contribution, it will be a wash.

If you do this before October 15, 2008 you should not owe the 6% penalty.

For 2008, because you are over age 50, you can contribute up to the lesser of your earned income or $6,000.

clydewolf,

Thank you very much for the reply.

So no matter what I do, (even if I take the 6% penalty), I would have to recalculate my 2007's tax?

Hym,

Of course. You reported a $1,000 exemption on line 32 of your 1040.
You do need to pay the tax on that amount.

Get this fixed now and avoid the 6% penalty.