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I'm in the same situation for 1999. My income exceeded the $95,000 limit by $1,000 (how could I predict I was going to get a bonus). Per Publication 17, it states that I can prorate the amount that I went over between $95k and $110k and still contribute that amount to a Roth (I can contribute $1866 for 1999). The difference I must remove from my Roth account with I believe a 6% penalty (not sure if this applies to dividends, interest, etc accumulated on that portion). Does anyone have a different understanding as to how this is treated?

Good news - there's no 6% penalty if you do things correctly. Since you're in the phase out range, you would need to recharacterize only part of the contribution, plus its earnings, to a traditional IRA. Only if you withdraw the excess contribution and earnings (without recharacterizing to a traditional) will you have taxes and penalties.

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