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Warning: Long post, tending toward a rant.

Back in January, my wife and I each contributed $2K to Roth IRA's for this year. Now I realize that increased salary and capital gains will push our AGI into the phase-out range, $150-$160K. I've read IRA Pub. 590, and think I understand it, as far as it goes.

If we leave the excess in the IRAs, we have to pay 6% excise tax on the excess every year. The every year part bothers me, but too bad, right? We can eliminate the excess by applying it to our contribution next year, if we qualify for one. (Might have significant capital gains again.) Would still have to pay 6% for 1999. And every year, until we qualify for a contribution.

We can avoid the excise tax by withdrawing the excess, and all earnings on it, before our filing deadline. The earnings get reported as income for 1999, even if the withdrawal is in 2000. Since we're in the phase-out range, this decreases our allowed contribution, which increases the amount we have to withdraw.... It's a never-ending series. OK, I'm handy with Excel, I think I can figure it out. But it seems ridiculously complicated. And, I can't really figure it out exactly, because the IRAs are in a mutual fund, and I won't know the sales price until after I sell. Arrghh! (Sound of modern man, confronting an intractible dilemma.) They didn't put this part into Pub. 590. Didn't dare to.

I do have some losers in my taxable account, that I could sell this month to get capital losses. Not enough to get us out of the phaseout range. I had been thinking of selling some of them anyway, before I realized the mess I'm in. (OK, it's a good mess to be in. I'm very grateful for the capital gains. Just wish I'd realized what I was getting into.)

I really don't want to pay 6% year after year, even on just $2K or so. So I think I'll sell the losers, then withdraw what I think I need to to get the excess to zero.

Now, finally, a question. Can the gains I withdraw qualify as long-term capital gains, if I wait a year and a day from purchase? Withdrawals from a Roth are generally taxed as ordinary income, but I'm hoping this may be a special case.

Thanks in advance for your help.


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