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Author: letranger One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121600  
Subject: Roth IRA & "earned income" Date: 11/18/1998 10:29 PM
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This year I opened a Roth IRA with $2000. The problem is, between being a full-time student most of the year, and taking time off for travel and other stuff the rest of the year, it looks like I won't have made $2000 in "earned income" by the end of the calendar year. I will have made plenty in capital gains, but (as I understand it) I'm not allowed to contribute any of that to my IRA.

What exactly is Uncle Sam going to do to me if I've contributed more to my IRA than I've made in "earned income"? To meet the "earned income" requirement, would I necessarily need to make that money before Dec. 31, or is it possible to count income made in the first quarter of 99 as having been earned in 98 for tax purposes? (This question isn't as weird as it sounds: I know that it would have been possible to contribute money to a Roth IRA in 97, for tax purposes, anytime during the first quarter of 98.)

-jason
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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: 6389 of 121600
Subject: Re: Roth IRA & "earned income" Date: 11/19/1998 7:27 PM
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[[This year I opened a Roth IRA with $2000. The problem is, between being a full-time student
most of the year, and taking time off for travel and other stuff the rest of the year, it looks like I
won't have made $2000 in "earned income" by the end of the calendar year. I will have made
plenty in capital gains, but (as I understand it) I'm not allowed to contribute any of that to my IRA.]]

That's right...you've got to have earned income in order to make a Roth IRA contribution.

[[ What exactly is Uncle Sam going to do to me if I've contributed more to my IRA than I've made in
"earned income"? ]]

It depends upon what YOU do with the "excess contribution". If you do nothing, and simply leave it in there, you'll get hit for a 6% penalty tax on that contribution for each and every year that the "excess" contribution remains in the account.

[[To meet the "earned income" requirement, would I necessarily need to make that
money before Dec. 31, or is it possible to count income made in the first quarter of 99 as having
been earned in 98 for tax purposes? (This question isn't as weird as it sounds: I know that it would
have been possible to contribute money to a Roth IRA in 97, for tax purposes, anytime during the
first quarter of 98.)]]

The question isn't weird at all. In fact, it's pretty clear thinking. Sadly, that's not the way it works.

If you have an excess contribution in your Roth IRA, in order to avoid the 6% penalty, you must remove those excess contributions (and the associated earnings) prior to the due date of your tax return.

While you certainly could designate the excess contribution as part of your 1999 Roth IRA contribution, you would still get hit in 1998 for the 6% penalty on the excess contribution that took place for 1998.

So your best bet, if you know that you will not meet the earned income rules, is to get rid of the excess now (or be prepared to pay the penalty).

TMF Taxes
Roy

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