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Author: pepsidoodle Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121598  
Subject: IRS said I couldn't Date: 2/17/1999 10:05 AM
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This ROTH IRA is driving me crazy!!!
I am single, contributed (not converted) $2,000 to a Roth IRA in 1998 which, in turn, had a 61.5% gain in 1998. My 1998 AGI was about $107K. I also have a 401K plan with my employer.
I called the IRS & asked them about "reconstructing" the entire amount into a regular non-deductible IRA and was told I couldn't do this because of my earnings & because I have a 401K plan with my company.
I'm at a total loss on how to handle this. Do I just rescue what I can & leave it in the Roth, using the phase out method? If so, what do I do with the $2K that was already taxed? What about the gain? If I have to sell the stock, will the gain need to be applied to 1998 taxes?
I hope someone can understand my confusion & help me through this mess. I'm not sure if I've even covered all the issues.
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Author: UUinMN Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10436 of 121598
Subject: Re: IRS said I couldn't Date: 2/17/1999 1:51 PM
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"I'm at a total loss on how to handle this. "

I feel the same way. You didn't tell us what you're trying to accomplish. Sounds like you want to terminate the Roth, but you didn't say why. I suggest you leave it alone until you're 59 1/2, and the money has been in there 5 years. Then if you need to, you can take it out, tax free. All of it, gain included.

What's to rescue?

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10527 of 121598
Subject: Re: IRS said I couldn't Date: 2/19/1999 12:25 AM
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[[This ROTH IRA is driving me crazy!!!
I am single, contributed (not converted) $2,000 to a Roth IRA in 1998 which, in
turn, had a 61.5% gain in 1998. My 1998 AGI was about $107K. I also have a
401K plan with my employer.]]

So far so good...except for the fact that your $107k AGI puts you in the "phase out" range with respect to your Roth IRA contribution. So that'll be a problem.

[[ I called the IRS & asked them about "reconstructing" the entire amount into a
regular non-deductible IRA and was told I couldn't do this because of my
earnings & because I have a 401K plan with my company.]]

I think that you mean "recharacterize" your Roth IRA back to a traditional IRA. And there is no reason that you can't...regardless of the bad information that you were given by the IRS.

[[ I'm at a total loss on how to handle this. Do I just rescue what I can & leave it in
the Roth, using the phase out method? If so, what do I do with the $2K that was
already taxed? What about the gain? If I have to sell the stock, will the gain need
to be applied to 1998 taxes?
I hope someone can understand my confusion & help me through this mess. I'm
not sure if I've even covered all the issues.]]

If you DO want to keep some of it in the Roth IRA (it won't be much), you'll have to do some fancy computations. If you want to make your life easier, you can simply recharacterize the whole thing to a traditional IRA (non-deductible). That will make the earnings "taxable" in the future if you ever try to convert the traditional IRA to a Roth IRA, but it is a LOT better than paying the tax and penalties now on a distribution.

It would see like a recharacterization is in your future.

You can read more about the recharacterization issues in the Taxes FAQ area. Check it out.

TMF Taxes
Roy

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