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Author: brxkic One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: Excess Roth IRA contributions Date: 3/2/2004 10:13 PM
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Hello Fools:

I contributed the full amount to 2 different Roth IRA acoounts ($1200 to a brokerage account and $1800 to a TIAA-CREF mutual fund), for a total of $3000. I separated from my husband in Feb 2003. We only lived together for 15 days in Jan 2003, but I'm sure in the IRS's eyes, I am way above the $10000 AGI limit for Roth Contribution for my filing status (married filing separately.)

I think the following are my options--please correct me if I am incorrect:

(1) Have all the $3000 plus earnings returned to me, and pay the extra 10% tax on the earnings on top of the regular rate. Related question is: I contribute every month last year (DRIPing), and have dividends distributed from 2003 contributions and also from previous tax year distributions. How do I figure out my earnings?

(2) Recharacterize it to a nondeductible Traditional IRA? Related question is: I am already planning on closing the particular brokerage account (that is the costodian for the $1200 Roth contribution in question) later this year. I also have other investments through them, but I generally don't like their selection of stocks. If I recharacterize the $1200 in this brokerage account, that means I have to open up another traditional IRA account with them, and there will be two separate fees for closing out and transferring IRA accounts when I want to switch. Is there something that is a transfer out and recharacterization procedure all combined in one? Note that I have 2003's and previous years' Roth contributions with this brokerage account. So it's more like recharacterizing part of the Roth account and transferring out the whole account. Is this going to be a nightmare?

(3) I am also planning on purchasing a house this year, so I also thought if I could use this excess Roth IRA withdrawal as the first-time home purchase funds. But I probably don't qualify because I made my frist Roth contribution for the tax year 2000?

Please advice!!!!
Annie <sigh>
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70310 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/2/2004 10:58 PM
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1.) It sounds like a divorce is likely. If it is final this year, then you can file as single. If it is not, you still have the choice of filing jointly.

2.) If you already have an IRA, the IRAs could be combined but they are going to charge fees. It might be better to just close it.

3.) If you are planning on using the funds for a downpayment, it does not make sense to contribute and withdraw the funds in the same year. Contributions (non-rollover) ROTH contributions can be withdrawn at any time without penalty.

Debra

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Author: brxkic One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70311 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/2/2004 11:21 PM
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Debra:

"1.) It sounds like a divorce is likely. If it is final this year, then you can file as single. If it is not, you still have the choice of filing jointly."

But the divorce was not final by the Dec 31, 2003. I though I couldn't file as single in this case?

Annie

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70312 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 12:01 AM
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(1) Have all the $3000 plus earnings returned to me, and pay the extra 10% tax on the earnings on top of the regular rate. Related question is: I contribute every month last year (DRIPing), and have dividends distributed from 2003 contributions and also from previous tax year distributions. How do I figure out my earnings?

The custodian has the IRS's Captain Marvel Magic Calculator and will handle this for you.

(2) Recharacterize it to a nondeductible Traditional IRA? Related question is: I am already planning on closing the particular brokerage account (that is the costodian for the $1200 Roth contribution in question) later this year. I also have other investments through them, but I generally don't like their selection of stocks. If I recharacterize the $1200 in this brokerage account, that means I have to open up another traditional IRA account with them, and there will be two separate fees for closing out and transferring IRA accounts when I want to switch. Is there something that is a transfer out and recharacterization procedure all combined in one? Note that I have 2003's and previous years' Roth contributions with this brokerage account. So it's more like recharacterizing part of the Roth account and transferring out the whole account. Is this going to be a nightmare?

The simplest approach would be to transfer the entire Roth then do the recharacterization when the new custodian has the account. Caution: Verify high in the food chain and in writing that you won't run into a problem with the new custodian.

The alternative would be to do the recharacterization as a rollover. Take the distribution from the old custodian, being sure to specify no withholding, roll that into a Roth at the new custodian, and immediately recharacterize.

(3) I am also planning on purchasing a house this year, so I also thought if I could use this excess Roth IRA withdrawal as the first-time home purchase funds. But I probably don't qualify because I made my frist Roth contribution for the tax year 2000?


You can withdraw all your contributions without tax or penalty and up to $10,000 in conversions or earnings without penalty. See the ordering rules in the Roth section of Pub 590.

Phil Marti
VITA Volunteer

P.S. You're right about your filing status, unless you had a dependent child in your home in 2003.

PM


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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70313 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 12:55 AM
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But the divorce was not final by the Dec 31, 2003. I though I couldn't file as single in this case?

Sorry, I misread the years. You are correct.


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Author: brxkic One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70315 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 1:50 AM
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I just looked more closely at Form 5329 Part IV. It looks like I can pay a 6% penalty for the $3000 excess Roth contribution this year, contribute nothing to Roth for tax year 2004, and in essence apply my excess contribution for 2003 to 2004. Am I correct on this? If it is so, is that a better deal than withdrawing the contributions+ earning, or recharacterizing it to a nondeductible traditional IRA (a.k.a. headache)?



Annie
<more headaches>

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70317 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 4:45 AM
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I just looked more closely at Form 5329 Part IV. It looks like I can pay a 6% penalty for the $3000 excess Roth contribution this year, contribute nothing to Roth for tax year 2004, and in essence apply my excess contribution for 2003 to 2004. Am I correct on this? If it is so, is that a better deal than withdrawing the contributions+ earning, or recharacterizing it to a nondeductible traditional IRA (a.k.a. headache)?

That is an option. As for whether it's a better deal, it's a different deal with its own plusses and minuses. It's certainly the easiest solution, and the penalty will be less onerous when you consider the fees you would have paid for recharacterization (and possible later conversion). The downside is that your combined 2003-2004 contribution is limited to $3,000, half what it would be if you recharacterized.

Phil

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Author: Aleph Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70323 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 2:05 PM
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I have a similar situation in reverse. I contributed $3500. to my Roth IRA in March 2003 for the 2003 tax year as a single tax payer. In September 2003 I was married. My wife and I are filing taxes separately making my IRA contribution for 2003 no longer allowable.

I have submitted a "removal of excess IRA payment" form to my IRA custodian. They will return the original contribution amount plus the calculated earnings on that contribution. I've instructed them not to deduct any taxes.

My IRA custodian says they will send a 1099-R form in January of 2005. Does this mean I don't pay taxes on my 2003 IRA contribution earnings until tax year 2004? Or do I report the earnings (as reported to me by my IRA custodian) on my 1040 form for 2003? I couldn't get a straight answer from my IRA custodian. They mumbled something about "not giving tax advice".

Am I correct in my understanding that if I withdraw the money before April 15th I pay tax on the contribution earnings only (i.e. no 6% penalty on the contribution)?

Any clarification someone can offer as to when, where and how to report this is deeply appreciated? Thank you in advance.

Aleph (Mark)



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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70327 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 2:41 PM
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My IRA custodian says they will send a 1099-R form in January of 2005. Does this mean I don't pay taxes on my 2003 IRA contribution earnings until tax year 2004? Or do I report the earnings (as reported to me by my IRA custodian) on my 1040 form for 2003?

The latter. See Publication 590, and don't forget the 10% premature distribution penalty on the earnings.

Phil

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Author: pmmcateer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70329 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 3:37 PM
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Ok, I have a beginner question to all this. Me and my wife were told to file separately for the 2003 tax year and we did, does this mean I can't contribute to a Roth IRA for 2003 earnings? Or did I read a couple of the posts above wrong? I was planning on starting a RIRA this week, and wanted to put my money to the 03 year so I can contribute more next year.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70330 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 3:57 PM
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Me and my wife were told to file separately for the 2003 tax year and we did, does this mean I can't contribute to a Roth IRA for 2003 earnings?

Yes, if your AGI was over $10,000. Why were you told it was to your advantage to file separately?

Phil

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Author: pmmcateer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70333 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 4:34 PM
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Yes, if your AGI was over $10,000. Why were you told it was to your advantage to file separately?

She told us we would get a better return if we filed separate for some reason. Darn, I guess I'll just have to start with funding a 2004 then...bummer.

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70334 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 5:04 PM
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She told us we would get a better return if we filed separate for some reason.

Who is "she" and what are the numbers? I hate to be so nosy, but unless you live in Ohio it's highly unlikely that Married, Filing Separately is an advantageous filing status for you. I'm concerned that you're getting bad advice.

Phil

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Author: brxkic One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70336 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 5:23 PM
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Phil:

For the withdrawal of original contribution (not conversions, or earnings) from a Roth, is it true that it would be tax free even though the money has been there for less than 5 years?

So let's say I really need some money comes July (which I know is a bad idea, but just an example), I can have a portion of the original contribution distributed to me (no penalties, and tax free). And since I have excess Roth contribution for tax year 2003 (for which I will pay a 6% penalty), if I receive a distribution of let's say any amount more than $3000 this year, then I can again contribute to a Roth for tax year 2004 (all from Form 5329 part IV)?

Thanks again!
Annie

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70338 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/3/2004 6:48 PM
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For the withdrawal of original contribution (not conversions, or earnings) from a Roth, is it true that it would be tax free even though the money has been there for less than 5 years?

Yes. Remember that you never received a tax benefit from the contribution.

So let's say I really need some money comes July (which I know is a bad idea, but just an example), I can have a portion of the original contribution distributed to me (no penalties, and tax free). And since I have excess Roth contribution for tax year 2003 (for which I will pay a 6% penalty), if I receive a distribution of let's say any amount more than $3000 this year, then I can again contribute to a Roth for tax year 2004 (all from Form 5329 part IV)?

Not quite right. You have a $3,000 excess contribution for 2003 and don't plan to correct that situation before 4/15/2004. If you take distributions later in 2004, you can contribute the amount distributed, to a limit of $3,000, for 2004. See the discussion on page 47 of Pub 590. (This discussion is directed at traditional IRAs, but the same rules apply to Roth.)

Now for a little Dutch Uncleing. An IRA isn't a rainy day fund; it's a retirement account. If you bounce money in and out of an IRA you're going to give up a lot of your earnings in unnecessary fees to the custodian. You should have a liquid emergency fund, but not in a retirement account. For help on budgeting, the Budgeting board here at the Fool is pretty good.

Phil



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Author: pmmcateer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70357 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/4/2004 7:09 PM
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Who is "she" and what are the numbers? I hate to be so nosy, but unless you live in Ohio it's highly unlikely that Married, Filing Separately is an advantageous filing status for you. I'm concerned that you're getting bad advice.

I'm in the military, and got my taxes done by the military who provides a free service. I believe she told us to file separately because my wife pays California State taxes and I do'nt. Honestly she recommended it and I took her advice, I'm not too tax savvy so I figured she should know better. We already filed, is there any way around it? I would really like to contribute to 03. Thanks Phil.

Patrick

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Author: agg97 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70358 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/4/2004 7:15 PM
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I'm in the military...

Thank you for serving our country.

-Agg97

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Author: pmmcateer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70359 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/4/2004 7:44 PM
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Thank you for serving our country.

-Agg97


Wow, I can think of only one other person in the 5 yrs I've been in to simply say thanks...I think that is the best compliment you can give someone in the service...a simple thanks:) Thank You for your support!

Patrick

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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70360 of 120809
Subject: Re: Excess Roth IRA contributions Date: 3/4/2004 8:26 PM
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We already filed, is there any way around it? I would really like to contribute to 03.

The only way you can make a Roth contribution for 2003 is to amend your returns and file jointly.

An option would be to "recharacterize" the Roth contribution and the earnings on it as a traditional IRA contribution. You could then in a later year, when you're living together, convert the traditional IRA to Roth.

Since the preparer has seen your numbers and I haven't, and given that CA is a pretty confiscatory income tax state, I have to butt out and suggest that you leave your filing alone. However, I do recommend the recharacterization of the IRA contribution. That would require an amendment to your return to include Form 8606 establishing your basis in the traditional IRA.

Phil

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