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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Reverse Roth question Date: 1/27/1999 5:14 PM
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In response to my question, TMFTaxes suggests:

Let me give YOU an example and see if we are on the same page...

Let's say that your $1,800 that will stay in the Roth IRA earned $180. No problems. That will all stay within the existing IRA. Lets say that your additional $200 "excess" Roth IRA contribution earned an $25 during the time that it was in the Roth. You now know that you can't make that additional $200 contribution because of the phase out rules.

You are allowed to remove $225 fro your Roth IRA, and recharacterize it back to a traditional IRA. The code allows you to treat that as a $200 contribution to our traditional IRA, with the $25 earnings simply "following" the original cash.

Does this answer you question? I hope so. If not, please leave another posts.


I reply:

I think you're right that our wires are a little crossed, and I also think I know where. I'm not sure you realized that, like a good little Fool, I have already contributed $2000 into a traditional IRA for the 1998 tax year. Your example appears to assume that I contributed to a Roth. My original question was: now that I've discovered to my surprise (and dismay) that I am partially eligible for the Roth, can I move those contributions from my already-existing traditional IRA into a Roth (which I will have to create). Based on this discussion, it appears that I am entitled to recharacterize contributions up to my "Roth limit" (approximately $1800), together with their associated earnings, from traditional to Roth. Publication 590 and the instructions to Form 8606 appear to confirm my understanding.

Thus, to use your numbers, I would be able to recharacterize $1980 ($1800 in contributions plus $180 in associated earnings) from my traditional IRA to my (newly created) Roth, leaving the remainder (which happens to be $225 -- $200 in contributions and $25 in associated earnings) where it started, in the traditional IRA. This permits me to avoid taxes or penalties completely. By the way, I think that I want to maximize, not minimize, the earnings that follow contributions into the Roth, because I will eventually enjoy those earnings (compounded!) tax-free. Do I have it right? --Bob
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