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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: of 121587  
Subject: Re: roth ira contribution question Date: 1/18/2000 1:28 PM
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<<There were indeed FICA and Medicare taxes withheld from the check. Based on what you say, it sounds promising. >>

Don't know about promising...but it sure sounds like "earned" income.

<<I did search through the IRS website. Found nothing specific. They did have a Tax Law questions by email function so I submitted the question to them. >>

Good luck...

<<I did develop another concern based on something that I encountered on the IRS website. I took the following quote from an article entitled Employee Compensation.>>

OK...

<<If you are an employee, you should receive a Form W-2 from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2.>>

Right...

<<If you are not an employee, you generally will not receive a Form W-2. Nonemployee compensation is generally reported on Form 1099-MISC, Miscellaneous Income. For information on reporting nonemployee compensation, see the instructions on the back of Form 1099-MISC>>

OK again...

<<Based on this excerpt and the fact that my employment terminated in October of last year, do you think that it is possible that my severance income will be reported on this 1099-MISC instead of the W-2?>>

Anything's possible, but I would be very, very surprised. 1099 forms are for non-employee compensation, with no withholding for FICA or FWT. It would be a real twist of logic to give you a 1099 while at the same time withholding FICA. It just wouldn't make any sense.

<< I did not know enough to ask this question of my employer before I left and I don't particularly feel excited about spending another $15 to be put on hold and then told that they don't know again.>>

Can't blame you...

<<Another thought is, if I put the $2000 in, and then early next year find out that I wasn't supposed to, is it possible to take it back out as if I never put it in in the first place. Somebody mentioned that this might be possible and something I should consider.>>

Sure...you can recharacterize the Roth IRA back to a traditional IRA (including the contributions and the earnings). The deductibility of the IRA will be based upon a new set of rules (as noted in the Taxes FAQ area). But the worst that would happen is that you would have a non-deductible traditional IRA.

You could certainly remove the contribution (tax and penalty free), but any earnings that are removed would be subject to both tax and penalties.

So the choice is yours...but a recharacterization would likely be in your best interest. This is also discussed in the Taxes FAQ area.

TMF Taxes
Roy
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