Message Font: Serif | Sans-Serif
No. of Recommendations: 0
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
Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.