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Over the summer, I had a client come in and do some planning. He needed some cash to buy some new equipment for his business. With that equipment, he had a contract in hand that would increase his income quite a bit.

We ended up deciding to take an early withdrawal from his Roth IRA. He didn't have a lot of earnings in the account, so the penalty wouldn't be bad.

Fast forward to today. Things actually worked out as planned, and now he has cash again and wants to make a Roth IRA contribution for 2009 to start restoring his retirement savings. So I drop the contribution in to my program. Much to my surprise, his tax dropped. Hmmm.

Turns out that when you figure up the taxable portion of the Roth withdrawal, you include all contributions for the current year. Including contributions made for the year AFTER the end of the year.

So while it was way too late to take advantage of a 60 day rollover, we still mitigated some taxable income and penalty by making a fresh contribution for the year. Interesting. Learned something again today.

Here's the rough timeline and numbers:

Previous contributions to Roth 5,000
conversions to the Roth 20,000
amount withdrawn 40,000
balance in Roth after withdrawal -0-

Withdrawal was in July or August and was the entire balance in the Roth. There are no other Roth accounts. So from the withdrawal date to now, he hasn't had anything in a Roth IRA.

I thought the amount subject to tax and penalty would be 15k. But after making the current contribution, my program is calculating it at 10k. And looking at the instructions for Form 8606, line 22 (where your Roth contributions are reported) it clearly says to include contributions made for 2009 and earlier years. This contribution is clearly for 2009, so it appears to be included on this line, making things better for him.

--Pat
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