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I saw the earlier post by WiseNLucky, but I didn't see any mention of applying the excess contributions to the next year's contributions. I found this on the IRS Pub 590:

Applying excess contributions.
If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.


Does anyone have any information on how exactly to do this? I've just discovered that I over-contributed for 2001, and would like to move the contributions to 2002. I'd also like to know if I'm still subject to the 6% penalty if I move the contributions to this year.

Any information would be GREATLY appreciated!

OLF
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Greetings, OLF, and welcome. You asked:

I saw the earlier post by WiseNLucky, but I didn't see any mention of applying the excess contributions to the next year's contributions. I found this on the IRS Pub 590:

Applying excess contributions.
If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.


Does anyone have any information on how exactly to do this? I've just discovered that I over-contributed for 2001, and would like to move the contributions to 2002. I'd also like to know if I'm still subject to the 6% penalty if I move the contributions to this year.


It's simple. In an earlier post, you said the excess contribution you made was to a Roth. In that case, just leave the excess in the Roth. Pay the 6% penalty due in 2001 for the excess contribution made in that year. For 2002, call the excess for 2001 a regular Roth contribution for 2002. Then make sure if you add more money to the IRA, that those extra contributions PLUS the excess remaining in the IRA do not exceed your allowable contribution limit for 2002. The cost to you is the 6% penalty for the prior year.

Regards..Pixy
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Thanks Pixy!

So there really isn't a benefit to switching the contributions to 2002 then. I thought that if I switched them over I might avoid the penalty. Or am I missing something here?

If I have to pay the penalty anyway, would it be a good idea to keep the money in for 2001 and make another full year's worth of contributions for 2002?

I also saw an option to withdraw the contributions before the date I file to avoid the penalty. However, since it was all equity contributions, I would still take a loss. Again, doesn't seem like a good idea.

(Basically, I discovered that I was not eligible to contribute any amount and I contributed the maximum amount, so we're looking at 2K here.)

Thanks,
OLF
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OLF writes:

So there really isn't a benefit to switching the contributions to 2002 then. I thought that if I switched them over I might avoid the penalty. Or am I missing something here?

I also saw an option to withdraw the contributions before the date I file to avoid the penalty. However, since it was all equity contributions, I would still take a loss. Again, doesn't seem like a good idea.

(Basically, I discovered that I was not eligible to contribute any amount and I contributed the maximum amount, so we're looking at 2K here.)


The only way to avoid the penalty is to withdraw the excess along with its associated earnings (or loss) by April 15. The IRA provider will do the computation for the gain or loss. In your case it would be a loss. That is claimable only if you itemize. Then it goes into the Miscellaneous section of Schedule A and means something only if the loss exceeds 2% of your adjusted gross income. You will have to decide what's best for you, paying the $120 penalty for the excess and using the contribution for 2002 or taking the loss on your principal as a result of the withdrawal.

Regards..Pixy




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(Basically, I discovered that I was not eligible to contribute any amount and I contributed the maximum amount, so we're looking at 2K here.)

I'm confused. If you contributed the 2K to a Roth, and now find you're not eligible for the Roth, you can "recharacterize" to a Traditional IRA. I don't think it's too late - I think you can do this until filing time. There would be no penalty for this - it is done thru your Roth custodian, and you wouldn't have to sell your stocks or do anything other than the recharacterization, which is just a paper transaction.

TMF Pixy - correct me if any of the above is wrong.

cheers!
jtr
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(Basically, I discovered that I was not eligible to contribute any amount and I contributed the maximum amount, so we're looking at 2K here.)

If you didn't qualify in 2001, are you sure you will on 2002? If you don't it's another 6% penalty. If you don't want to withdraw the funds, consider a recharacterization to a traditional IRA. It may not be deductible but it gets rid of the penalty and you can always contribute extra funds to a Roth in 2002.
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JTR writes:

I'm confused. If you contributed the 2K to a Roth, and now find you're not eligible for the Roth, you can "recharacterize" to a Traditional IRA. I don't think it's too late - I think you can do this until filing time. There would be no penalty for this - it is done thru your Roth custodian, and you wouldn't have to sell your stocks or do anything other than the recharacterization, which is just a paper transaction.

TMF Pixy - correct me if any of the above is wrong.


You're absolutely correct. In my haste to address the withdrawal issue, I totally neglected to address recharacterization. A recharacterization of the contribution as one made to a tradtional IRA (probably a nondeductible one given other cited circumstances) avoids the penalty for an excess contribution as well as the withdrawal. While that may take place as late as October 15, 2002, it will entail the filing of Form 8606 for a nondeductible contribution. Arguably, then, the recharacterization should take place before taxes are filed to avoid the issue of filing an amended return.

Good catch, jtr!

Regards..Pixy
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Wow. I really appreciate all of the help you're all giving. At the risk of sounding like the complete amateur that I am with IRA's, here's the total situation.

I'm overseas, and using a 2555 (Foreign Earned Income Exclusion) which covers (sadly) all of my income for 2001. Since I'll be returning stateside this year, I won't be able to claim the exclusion for 2002 and will have to pay federal taxes, so I believe that I will qualify for the Roth contributions for 2002.

Here's the new questions your answers have planted in my bargled mind:

If I recharacterize to a traditional, will I later be able to change it back to a Roth or is it then set as a traditional until I retire? I ask because (using TMF's formula) I think the Roth is better for me in the long run. I don't know that I'll ever completely understand all the ins and outs, so I'm trying to make the most with my retirement savings while keeping it as simple as possible.

If I do recharacterize my contributions from last year into a traditional, can I contribute to a Roth for 2002, and will this be even more complicated when I withdraw the money at retirement?

Also, since I do not have taxable income at all for 2001, would I even qualify for the traditional at all? I suppose that's really the first question.

Thanks again for your help and patience.

OLF
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OLF writes:

I'm overseas, and using a 2555 (Foreign Earned Income Exclusion) which covers (sadly) all of my income for 2001. Since I'll be returning stateside this year, I won't be able to claim the exclusion for 2002 and will have to pay federal taxes, so I believe that I will qualify for the Roth contributions for 2002.

Unless you have some earned compensation (i.e., job wages) that are NOT excluded from possible income taxes, then you are NOT allowed to make an IRA contribution to either a Roth or a traditional IRA.

If I recharacterize to a traditional, will I later be able to change it back to a Roth or is it then set as a traditional until I retire?

Assuming you actually can make an IRA contribution, then you can recharacterize to a traditional IRA this year. Once that is done, you can't recharacterize to a Roth in some subsequent year. You can, though, convert that traditional IRA to a Roth IRA provided you meet AGI limits to do so in the year of the conversion (an AGI of $100K or less). When you convert, you must pay income taxes on all previously untaxed money that is in the converted traditional IRA.

If I do recharacterize my contributions from last year into a traditional, can I contribute to a Roth for 2002, and will this be even more complicated when I withdraw the money at retirement?

Again, if you have the earned compensation to do so, then you may contribute to either a traditional or a Roth IRA in 2002. For the latter, you must meet the AGI limits for you filing status in that year.

Also, since I do not have taxable income at all for 2001, would I even qualify for the traditional at all? I suppose that's really the first question.

Finally, we get to the nub of the matter. No job income to be claimed on your income tax return, then no IRA contribution. Period. End of discussion. :-)

I highly recommend you read our very thorough IRA area to gain a better understanding of the ins and outs of IRAs. You will find it at http://www.fool.com/money/allaboutiras/allaboutiras.htm

Regards..Pixy


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OLF -

I also saw an option to withdraw the contributions before the date I file to avoid the penalty. However, since it was all equity contributions, I would still take a loss. Again, doesn't seem like a good idea.

Pixy -

Finally, we get to the nub of the matter. No job income to be claimed on your income tax return, then no IRA contribution. Period. End of discussion. :-)

Depending on your Roth provider, it MAY (?) be possible to have the account transferred/changed, in kind, to a taxable brokerage account with the provider, and thus avoid penalty and cap. loss. You would have to explain this with a notation on your 1040, and maybe there's another form as well....Pixy to the rescue again?? I now have a splitting headache. <g>

Cheers anyway!
jtr
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If I have to pay the penalty anyway, would it be a good idea to keep the money in for 2001 and make another full year's worth of contributions for 2002?

You have to pay the penalty each and every year that the excess contributions remain in the account, until you withdraw them or designate them for the current year (when it still has room left in it).
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