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Author: rc2seth Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121567  
Subject: 2010 excess contribution to a Roth Date: 2/23/2011 2:38 AM
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I'm new here. Please help. Sorry this is a little long. Wife contributed after-tax $5000 to her several years old traditional IRA in increments over 12 months. At the end of 2010 in December, she rolled all that Traditional IRA to a Roth to take advantage of the rule to allow splitting and delaying the reporting of the taxable proceeds to 2011 and 2012. Ooops. Combined income too high for a 2010 Roth contribution. According to TurboTax that $5000 must be considered an excess contribution since she may not contribute to a Roth at all in 2010. The rollover to the Roth could only be for pre-2010 monies, says TurboTax. TurboTax gives a very confusing set of options for dealing with this. None seem reasonable (I know, "stop using logic or you will hurt yourself.")Can we just call the brokerage firm,say please recharacterize that $5000 back to the Traditional IRA, write the IRS a note saying 'sorry, the rules were too confusing for mere mortals and call it even?' Or must we somehow also figure out how much gains that $5000 has made from the end of December to the recharacterizing date and transfer that extra meager amount back to the Traditional IRA as well? Or is TurboTax just wrong about legally contributing after-tax money to the Traditional IRA in 2010 and rolling all of that IRA into a Roth at the end of 2010? Thanks for your thoughts and expertise.
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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112424 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/23/2011 3:53 AM
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I am not a tax pro but I believe you are confusing a Roth conversion with a Roth contribution or rollover.

You see for 2010, there is a special exception to the usual income limits on who can convert a traditional IRA to a Roth IRA that allows high-income taxpayers to make a Roth IRA conversion when they would normally be prohibited by the income limits.

Congress has eliminated the income limit on Roth IRA conversions. Highly-compensated taxpayers may now convert Traditional IRA accounts to Roth IRAs regardless of income. Special tax treatment for 2010 Roth IRA conversions allows taxpayers to spread the taxes due on the conversion out over two years making the tax burden much easier to handle by requiring only one-half of the taxes to be paid during 2011 and the other half of the Roth conversion taxes to be paid in 2012.

As far as what TT is telling you ... well, I am not sure. My guess would be you may have entered some data on the incorrect line? In any case, TT should have completed Part II of Form 8606 regarding your Roth Conversion. You should check to see if Part II of Form 8606 is properly completed by TT.

Your transaction should be treated as a Roth Conversion and therefore you need not worry about re-characterization etc.

If I am mistaken, I am sure this boards Pro's PIP Team (Peter, Ira, Phil) will correct me if I am wrong.

Best Regards,

Rich

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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: 112425 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/23/2011 6:01 AM
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Wife contributed after-tax $5000 to her several years old traditional IRA in increments over 12 months. At the end of 2010 in December, she rolled all that Traditional IRA to a Roth to take advantage of the rule to allow splitting and delaying the reporting of the taxable proceeds to 2011 and 2012. Ooops. Combined income too high for a 2010 Roth contribution. According to TurboTax that $5000 must be considered an excess contribution since she may not contribute to a Roth at all in 2010.

You have confused TurboTax or me. To make sure it's not me, allow me to re-tell your story.

As of 1/1/2010 your wife had a traditional IRA. She made tax year 2010 contributions of $5,000 to that IRA. In December 2010 she converted her entire traditional IRA to Roth. That transaction was fully completed in 2010. She has no other traditional IRA accounts.

If my version isn't 100% accurate stop reading here and clarify, because everything from here on assumes I'm correct.

She has done nothing wrong. She didn't contribute anything to a Roth IRA for 2010. There is no income limit for Roth conversions. Contrary to what I think a prior response said, the repeal of the Roth conversion income limit is permanent. However, as you noted, the split of conversion income applies to 2010 conversions only.

All of this is reported on Form 8606, which feeds line 15 of your 1040. The traditional IRA custodian should have issued a 1099-R showing the value of the traditional IRA at the time of conversion. When the dust settles that amount should appear on line 15a of your 1040 with a zero on line 15b.

Please read the instructions for Form 8606, parts I and II. Then go into Forms mode in TT and see what needs fixing. Or, you can start back through the Q&A and try to find where you went wrong.

Phil
Rule Your Retirement Home Fool

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112439 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 1:44 AM
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Hey Phil,

What did you say in your reply that I didn't in my post, other than Contrary to what I think a prior response said, the repeal of the Roth conversion income limit is permanent >> 'scratching my head'.

Dog gone it Phil .... when I referred to the PRO PIP Team I knew I should have put your name FIRST !! (LOL)

Cheers,

Rich :)

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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: 112440 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 5:19 AM
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What did you say in your reply that I didn't in my post, other than Contrary to what I think a prior response said, the repeal of the Roth conversion income limit is permanent >> 'scratching my head'.

Mea culpa. I should have gone back and commented immediately, but a pretty yellow bird flew by, and...

When I looked at your response to OP I thought I read that the income limitation repeal was 2010 only and didn't read any further. When I went back and read your post I saw that it was spot on and should have said so at the time. Sorry.

Phil
Rule Your Retirement Home Fool

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Author: rc2seth Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112441 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 9:13 AM
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Rich and Phil, Thank you for your kind replies. Very helpful. I have tracked down the problem. For others who use TurboTax, be very careful in how you answer its questions in its EasyGuides. When entering IRA info there are tremendous differences in meaning between transfers, rollovers, recharacterize, conversion. If you ever make a mistake in answering a question, even if you go back and correct your answer, TurboTax relentlessly applies your first answer and confusion abounds. My only recourse was to zero out the entire return and start over. Now it works just fine. Make sure you (talking to myself here!) know exactly what you are answering. If you correct an answer but TurboTax becomes nonsensical, you may have to start over. Thanks again Rich and Phil! Note: it looks like other TurboTax users were having similar problems with their IRA entries. Confusing EasyGuide screens.

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112442 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 9:36 AM
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If you ever make a mistake in answering a question, even if you go back and correct your answer, TurboTax relentlessly applies your first answer and confusion abounds. My only recourse was to zero out the entire return and start over. Now it works just fine.... If you correct an answer but TurboTax becomes nonsensical, you may have to start over.
______________________________________
That really should not have been necessary. I've never been unable to correct a "mistake", and I do make a few, if only to test the program :)

I've used Turbo Tax to do my own return (we use a higher-level product in the office) and don't always like the questions-interview approach, but sometimes following that gets you to right answer better. I prefer to use the direct input on forms, as it's faster. And once in a while, it doesn't flow the same way.

Bill

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Author: rc2seth Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112443 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 11:42 AM
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Bill,I surely agree it should not have been necessary to zero out the return and start over....trust me, in this particular case, TT was relentless. I erased all mention of IRAs, put in other things, went back to the IRA section and started over, only to be told I couldn't enter my wife's contribution to her traditional IRA because of the Roth even though I had deleted everywhere(!) all mention of that. Confusing, yeah. Thanks for your response. Perhaps it's because I use a Mac. Sometimes things originally written for PCs and "converted" for Macs aren't quite "right." Maybe...just guessing. I'm not dissing TT, just urging caution.
Rick

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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112445 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/24/2011 12:00 PM
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I'm not dissing TT, just urging caution.

TurboTax is a fine program. Intuit's GPS ads for TurboTax are fantasy. No tax software will work right unless you understand what ought to happen and make sure that the output makes sense for your own situation.

The more complex the tax code gets, and the more last-minute changes Congress makes, the more this will be true.

The skills of programming and tax analysis are rarely found in the same people. This will result in first pass interview questions being clumsy and/or ambiguous. Combine that with short lead times because Congress likes to make changes in December, and what hits the streets will have a lot of those first pass interview questions. There isn't time for proper beta testing, even if Ira and Phil could be persuaded to beta test (possible?) and Intuit would listen to their comments on interview accuracy (unlikely).

The last time I used TT to file my taxes, I had to go into forms mode to get the correct result. The interview simply wouldn't ask for the information the software needed to get it right. If I hadn't known what I was doing, I would have paid too much tax.

Patzer

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112446 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/25/2011 12:31 AM
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Mea culpa. I should have gone back and commented immediately, but a pretty yellow bird flew by, and...

No problem Phil :) I figured that you might review my post and knowing how meticulous you are (and that's a good thing) I must have reviewed my post at least 3 times to make sure it was correct before I hit the submit button. And then WHACK here you come, but I always do enjoy your sense of humor Phil! (lol)

.........................................................................................................................................................................

To: Rick the OP .... You are welcome. Glad "we" were able to help clarify your tax issue.


Best Regards,

Rich

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112451 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/25/2011 10:32 AM
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There isn't time for proper beta testing, even if Ira and Phil could be persuaded to beta test (possible?) and Intuit would listen to their comments on interview accuracy (unlikely).

Actually, I do beta teest a number of products for Intuit (the products vary from year to year). However, their beta test program runs months before product release. I don't know how they deal with last minute changes in the tax code.

Ira

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112474 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/26/2011 7:18 PM
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I don't know how they deal with last minute changes in the tax code.

Hey Ira

The word PANIC comes to mind.;)

Like I said in an earlier post, .... I am glad that I am not an IRS programmer/analyst when those late December final tax law changes come rolling in.

Rich

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112477 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/27/2011 12:57 AM
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I don't know how they deal with last minute changes in the tax code.

Hey Ira

The word PANIC comes to mind.;)


What I meant was that I don't know how they beta test last minute changes in the tax code. I've never been asked to test tax software later than early autumn (usually during the summer).

Ira

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112495 of 121567
Subject: Re: 2010 excess contribution to a Roth Date: 2/28/2011 4:04 AM
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What I meant was that I don't know how they beta test last minute changes in the tax code.

I understood what you were saying Ira. All I was saying somewhat in jest is that it must be a very stressful and chaotic time for the IRS system analysts/programmers to comply with a looming mandatory deadline with very little lead time. Maybe it is tested by internal IRS staff or maybe they use outside contractors? I don't know? In either case, the blood pressure readings of those poor souls must be "through the roof"

Don't you agree Ira?

Rich

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