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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Excess Contributions Date: 6/8/2002 1:26 PM
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Here's my problem:

Based on erroneous information received from several supposedly reliable sources, I find that I have contributed more than allowed to IRA's as follows.

In February 2002 I opened and funded the following IRA's:
Roth IRA $2000 (2001 tax year)
Roth IRA $2000 (2002 tax year)
Traditional Non-Deductible IRA $2000 (2001 tax year)

After researching the IRS site, I find that the 2001 Traditional IRA is in excess of the allowed combined total of $2000 for tax year 2001. I have not filed my return for 2001 as yet (have extension). I am allowed a total of $3500 for tax year 2002 on my Roth IRA (I'm over 50 and my AGI is less than $95K).

How should I resolve this?? Should I transfer $1500 into my Roth for 2002 (and would I need to also recharacterize the contribution since it would be for a different tax year? Could I transfer the remaining $500 to the Roth and recharacterize it for 2003 or would I have to wait until January to do the recharacterization? Or should I just revoke the Traditional IRA (is this possible?), suffer the penalties, and start over in a taxable account. If I transfer the assets directly from the Traditional IRA into a taxable account (without liquidation) can I defer gains taxes until the assets are liquidated out of the taxable account?

Lastly, I wish to apologize for any erroneous information I may have posted on this board in the recent past. The information was derived from an investment seminar presented by someone who represented himself as a Certified Financial Planner (and who I found out was just STUDYING for CFP certification). The information was also reinforced by a retirement calculator on one of the financial web sites which indicated that I was eligible to fund EACH of the two IRA's to the maximum amount instead of BOTH in combination.

The lesson I have learned is ALWAYS verify any information received before acting on it. I had verified that, starting in 2002, I could contribute the maximum of $12,000 into my 403(b) and $12,000 into a 457 plan (previously you could only contribute the maximum amount into both plans combined). So when I was told that the maximum was allowed in EACH of the IRA's, I thought it was a parallel situation, and I failed to do the necessary homework. So now I'm faced with the effort (and possibly some financial penalties) required to undo this mistake. Hopefully my error will help others in avoiding a similiar situation.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34658 of 76398
Subject: Re: Excess Contributions Date: 6/8/2002 4:04 PM
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Greetings, Brwhiz, and welcome. You asked:

How should I resolve this?? Should I transfer $1500 into my Roth for 2002 (and would I need to also recharacterize the contribution since it would be for a different tax year? Could I transfer the remaining $500 to the Roth and recharacterize it for 2003 or would I have to wait until January to do the recharacterization? Or should I just revoke the Traditional IRA (is this possible?), suffer the penalties, and start over in a taxable account. If I transfer the assets directly from the Traditional IRA into a taxable account (without liquidation) can I defer gains taxes until the assets are liquidated out of the taxable account?

Given that the contribution was for tax-year 2001, you will be assessed a 6% penalty on that $2K for that and all subsequent tax-years unless you remove that contribution. To escape that penalty, you must remove the excess contribution (to include any earnings) prior to the deadline of your extension for filing in 2001. You may read up on the details of the corrective actions you may take in IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. See pages 41 and 42 for specifics.

You could leave the contribution in the IRA, pay the penalty, and either move $1.5K to a Roth IRA or leave it where it is, calling that $1.5K a contribution for 2002. You would than still have $500 excess contribution in the original account on which you would pay the 6% penalty in 2002. In 2003, you call the remaining $500 a contribution for that tax-year. Using this procedure, all earning can stay in the IRA without penalty or tax, but you still have to pay the 6% on $1,500 in 2001 and 6% on $500 in 2003. All you would avoid is the income taxation plus the 10% early withdrawal penalty on earnings that applies when you remove the proceeds prior to the filing of your 2001 return.

Lastly, I wish to apologize for any erroneous information I may have posted on this board in the recent past. The information was derived from an investment seminar presented by someone who represented himself as a Certified Financial Planner (and who I found out was just STUDYING for CFP certification).

If what you say is true, the CFP Board of Standards would very much like to learn this person's name and the circumstances involved for potential disciplinary action. Holding oneself out as a CFP licensee is a serious breach of professional standards, and I (as a CFP licensee) highly resent someone who would do so. I urge you most strongly to report this person. For information on how to do so, see http://www.cfp-board.org/cons_cmplt.html

Regards..Pixy


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Author: DougDanforth Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34659 of 76398
Subject: Re: Excess Contributions Date: 6/9/2002 7:55 PM
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Re: putting too much into an IRA. TMFPixy said, "Given that the contribution was for tax-year 2001, you will be assessed a
6% penalty on that $2K for that and all subsequent tax-years unless you
remove that contribution."

Now, if too much was put into a traditional IRA, but this amount was not reported on the tax return as deferred (that is, taxes were actually paid on the amount), does the same penalty apply? Or does something else happen?

Thanks, Doug

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34660 of 76398
Subject: Re: Excess Contributions Date: 6/10/2002 8:04 AM
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Greetings, Doug, and welcome. You asked:

Now, if too much was put into a traditional IRA, but this amount was not reported on the tax return as deferred (that is, taxes were actually paid on the amount), does the same penalty apply? Or does something else happen?

It makes no difference whether one may deduct the contribution or not -- it's still an excess contribution, so it must be removed. The same penalty applies. As to not reporting it, that could subject you to a fine because all nondeductible contributions to a traditional IRA must be reported on Form 8606 when the return for the year is filed. If they aren't, the IRS may fine you $25 IIRC. Don't forget -- The IRA provider reports the contribution even if you don't, so the IRS does have a means of checking such things.

Regards..Pixy


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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34711 of 76398
Subject: Re: Excess Contributions Date: 6/23/2002 3:36 PM
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One of the erroneous sources of contribution limit information that I mentioned in message 34656 on this thread was the Roth vs. IRA calculator on the Fool at:

http://www.calcbuilder.com/cgi-bin/calcs/IRA1.cgi/themotleyfool?Question=Income

If you go to this calculator and enter $3,000 per month as the amount you'd like to invest then select "How much can I contribute?", making no other changes and look at the results. In this case the information is so erroneous that I would never have believed it. However, when I entered my own parameters, it said I couldn't contribute anything to a deductible IRA, $2000 to a non-deductible IRA, and $3,000 to a Roth IRA. Unfortunately, these numbers looked reasonable, and knowing the limits for those of us over 50 is $3500 per year, I reached an invalid conclusion.

I realize that the fine print at the bottom says that there is no guarantee of accuracy with the calculator. However, this calculator is disseminating blatantly innacurate information and should be corrected or dropped from the site.

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