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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Overcontributed to Roth (Income Limits) Date: 4/26/2005 10:53 AM
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Okay, so I had no idea that there were AGI income limits attached to Roth contributions - my own fault.

2001 I have to pro-rate my contribution,
2002 I took a lot of time off so my income was waaay down - so that year is okay.
2003 & 2004 I shouldn't have contributed anything. I think for 2004 I might okay on penalties b/c I have filed an extension, though already submitted my taxes (according to my discount brokerage house no penalties should result b/c of extension - but who knows)

My accountant is going to need to file amended returns, but I'm wondering if anyone has any advice here - is there anything I can do to reduce the pain here? xfer to traditional ira or anything like that?


The only year you have any choices on is 2004. For all earlier years you must withdraw the excess contributions. That's withdraw, not covert or recharacterize or allocate or anything else that indicates you have any choice other than fully removing the excess contributions and the earnings on them from the IRA umbrella. You also owe 6% excess contribution penalty for each year the excess was in there. (If you haven't made a 2005 contribution and expect that you can, you could apply the 2003 excess to your 2005 contribution and not withdraw it. Since nothing about this was reflected on your prior year returns, there's no need for amended returns. The penalties can be paid on Form 5329, which can be filed by itself.

For 2005 you'll have the Roth distributions to report. Only any amount in excess of your total Roth contributions will be subject to tax and the 10% penalty. See Part III of Form 8606.

Now, 2004. You can withdraw the excess and the earnings anytime before your extended due date. Earnings are subject to 2004 tax and the 10% early distribution penalty, so if you go this route you'll have to amend 2004. Your other choice is to "Recharacterize" the 2004 as a traditional IRA contribution. If it's nondeductible you'll need to File a Form 8606, Part I to establish the IRA's basis. If it's deductible you'll need to amend your 2004 return to take the deduction.

Details about all this are in Publication 590 and the instructions for Forms 5329 and 8606.

Phil
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