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Hello,

My wife and I contributed $5,000 each to our respective Roth IRA accounts in January this year for the year 2011 (we've been doing this for years). During most of this period, my wife was not working outside the home.

Recently, I got a new job with a substantial pay hike, and my wife also started working part time (FWIW, the new job starts July 2011). As a result, I just realized that our AGI for 2011 may be over the limit for Roth IRA, and hence, we may not be eligible to contribute. At this point, it is difficult to precisely calculate whether this would be the case.

If we do exceed the limit, is there a way to withdraw the contribution without having to pay a penalty, either on the earnings or on the principal? Do we have any other options to avoid penalty/excees taxes?

I would appreciate it if you let me know. Thanks in advance for any help.

rochish
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If we do exceed the limit, is there a way to withdraw the contribution without having to pay a penalty, either on the earnings or on the principal? Do we have any other options to avoid penalty/excees taxes?

Relax. You have until 10/15/2012 to correct a tax year 2011 excess contribution. If it turns out you have a problem when your 2011 numbers are final, check back with us a year from now for your options.

The reference is IRS Publication 590.

Phil
Rule Your Retirement Home Fool
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Hi all,

I am the OP here. First, Phil, thanks for pointing me to IRS publication 590.

We're now at the end of the year, and my suspicion was correct. Our income for 2011 does not allow us to make *any* contribution to the Roth IRA. As noted above, we have already contributed $5,000 each for myself and my wife to the Roth IRA, and we need to fix this.

From publication 590, it looks like we are still eligible to contribute to the traditional IRA (though we can't deduct the amount on form 1040). If so, I think we would like to move the amount contributed from the Roth to the traditional IRA, instead of taking it back in the form of cash. We already have traditional IRA accounts with the same brokerage firm, so hopefully, this will be a simple transfer.

My questions are:

1. Can we move the amounts from the Roth to the traditional IRA in kind (i.e., just move the stock that was purchased instead of liquidating it)? This is a question for the brokerage firm, but I thought of asking in case anyone has experience doing this.

2. The stock we purchased in the Roth IRA accounts with the $5,000 has gone down in price. Are we required to move $5,000 worth of stock or just the number of shares purchased with the $5,000 to the traditional IRA?

If you know of any other issues we may face but are missing at this point, we'd appreciate knowing those as well. Thank you in advance.

rochish
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Our income for 2011 does not allow us to make *any* contribution to the Roth IRA. As noted above, we have already contributed $5,000 each for myself and my wife to the Roth IRA, and we need to fix this.

From publication 590, it looks like we are still eligible to contribute to the traditional IRA (though we can't deduct the amount on form 1040). If so, I think we would like to move the amount contributed from the Roth to the traditional IRA, instead of taking it back in the form of cash. We already have traditional IRA accounts with the same brokerage firm, so hopefully, this will be a simple transfer.


It should be. The magic word is "recharacterize." Each of you tells the Roth custodian that you want to recharacterize your tax year 2011 contributions from Roth to Traditional.

As for what gets moved, the amount is a result of a calculation the custodian will perform, but it's explained in Pub 590 if you want to follow along. The amount will not be the $5,000 that was contributed. What you need to tell the custodian is what you want moved in, if you will, a pecking order of first to last until they reach a current value equal to the calculated amount that goes to the traditional IRA.

Finally, each of you needs to file Form 8606 showing the $5,000 2011 nondeductible traditional IRA contribution with your 2011 return. I think you also need to attach an explanation about the recharacterization. Check the 8606 instructions.

Phil
Rule Your Retirement Home Fool
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Thank you so much, Phil. This is very helpful.

Can I ask you one more question? Instead of recharacterizing the amounts into traditional IRA's, if we take them back in the form of cash, can we claim the difference between what was paid ($5,000) and the current value of the stock (which will be liquidated soon) as capital loss? Just thinking of this option here.

Thanks again. I appreciate it.
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Instead of recharacterizing the amounts into traditional IRA's, if we take them back in the form of cash, can we claim the difference between what was paid ($5,000) and the current value of the stock (which will be liquidated soon) as capital loss?

No. If you liquidated all your Roth IRA accounts for less than the amount contributed you'd have a miscellaneous itemized deductionk subject to the 2% of AGI exclusion.

Phil
Rule Your Retirement Home Fool
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Thanks again for your help.
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Wouldn't his wife be entailed to put $5000 in her Roth IRA since her income is presumably small enough?
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Wouldn't his wife be entailed to put $5000 in her Roth IRA since her income is presumably small enough?

No. On a joint return, joint Modified AGI is the test.

Phil
Rule Your Retirement Home Fool
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Before you make nondeductible contributions to a traditional IRA, aren't there a couple of other caveats ? It seems like it can complicate withdrawals and if you want to roll money back to an employer plan later.
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Before you make nondeductible contributions to a traditional IRA, aren't there a couple of other caveats ? It seems like it can complicate withdrawals and if you want to roll money back to an employer plan later.

It complicates withdrawals only if you didnt comprehend long division in 5th grade (in my day), and they've fixed the law that gave rise to the potential problems with rollovers to employer plans.

Phil
Rule Your Retirement Home Fool
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I apologize For my post. I shouldn't have mentioned any concerns.
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Hi Phil (and other esteemed members of this board),

I'm the OP here. I did recharacterize the contribution from the Roth IRA to the traditional IRA, though I did it in 2012. From the IRS website* it looks like if the recharacterization was done in 2012, form 8606 does not need to be filled. Instead, a statement describing the recharacterization is needed. Is this correct?

I just want to make sure I am not misreading the IRS guidelines, especially since you indicated that form 8606 needs to be filled, though I realize you may have said it in relation to recharacterizations done in 2011.

I would appreciate it if anyone could shed light on this. Thank you so much!

* http://www.irs.gov/instructions/i8606/ch01.html#d0e459 (the relevant section is point 3 under "Recharacterizations")
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I'm the OP here. I did recharacterize the contribution from the Roth IRA to the traditional IRA, though I did it in 2012. From the IRS website* it looks like if the recharacterization was done in 2012, form 8606 does not need to be filled. Instead, a statement describing the recharacterization is needed. Is this correct?

I don't think so. I went back and looked at your earlier posts, and it appears that the (post-recharacterization) traditional IRA contributions are nondeductible. If so, each of you must file Form 8606, Part I, to report the nondeductible contribution. (See the second sentence of the source you referenced.) The amount is the amount recharacterized without respect to earnings. In your attached statement you show the numbers involved regarding +/- earnings.

Phil
Rule Your Retirement Home Fool
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Hi Phil,

THANK YOU so much for the speedy and extremely helpful response. I appreciate it. Needless to say, we are going ahead with including forms 8606 in our tax return.

Thanks again!
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