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Author: brucemn Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121146  
Subject: Roth IRA Corrective Distribution Date: 2/18/1999 10:30 AM
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If I have a "corrective distribution" from a Roth IRA (where you make a $2000 contribution and then discover that you are not eligible under the MAGI requirements), is the net income in that corrective distribution subject to the 10% penalty of section 72(t)? I can't find any information on this in the new IRA Regs. on Roth IRAs. I'm willing to take a chance and make the Roth contribution if the only downside (if I turn out not to be eligible) is that I owe regular (or capital gains) taxes on the net income in the corrective distribution, but if I get hit with a 10% penalty....
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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: 10506 of 121146
Subject: Re: Roth IRA Corrective Distribution Date: 2/18/1999 7:04 PM
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brucemn writes:

If I have a "corrective distribution" from a Roth IRA (where you make a $2000 contribution and then discover that you are not eligible under the MAGI requirements), is the net income in that corrective distribution subject to the 10% penalty of section 72(t)? I can't find any information on this in the new IRA Regs. on Roth IRAs. I'm willing to take a chance and make the Roth contribution if the only downside (if I turn out not to be eligible) is that I owe regular (or capital gains) taxes on the net income in the corrective distribution, but if I get hit with a 10% penalty . . . .

I reply:

I think you'll have another option if you exceed the AGI limit. You can "recharacterize" the Roth contribution as a regular IRA contribution. If you do so, the earnings follow the recharacterized assets. The effect is as if you had made the contribution to the regular IRA in the first instance -- i.e., no distribution, and no taxable event, penalty or otherwise. Good luck! --Bob

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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: 10602 of 121146
Subject: Re: Roth IRA Corrective Distribution Date: 2/19/1999 11:52 PM
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[[ If I have a "corrective distribution" from a Roth IRA (where you make a $2000
contribution and then discover that you are not eligible under the MAGI
requirements), is the net income in that corrective distribution subject to the 10%
penalty of section 72(t)? ]]

Yup...it sure is...IF you take the funds out of the Roth IRA completely. But if you actually make a proper recharacterization, these funds simply go back to the traditional IRA account, with no tax or penalty issues.

[[I can't find any information on this in the new IRA
Regs. on Roth IRAs. I'm willing to take a chance and make the Roth
contribution if the only downside (if I turn out not to be eligible) is that I owe
regular (or capital gains) taxes on the net income in the corrective distribution,
but if I get hit with a 10% penalty....]]

You can read more about these issues in the Taxes FAQ area. YOu might want to check out my post on recharacterizations for additional information. If you really make a recharacterization BACK to a traditional IRA, then you have no problem at all. But if you completely REMOVE the funds from the IRA, you'll pay tax at ordinary rates PLUS the 10% penalty on the "earnings" of the Roth IRA.

TMF Taxes
Roy

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