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I just learned that the $2000 Roth contribution I made for 1999 is invalid because of my 1999 AGI. This $2000 is now worth $3200 and is part of an account at a mutual fund that also holds my 1998 contribution. If I remove this $3200 from the account, I know I must report the $1200 earnings as regular income. But, is there any penalty? I have read a significant amount of IRS literature on the Roth, but cannot find a specific answer to this. I called the IRS, but they do not answer Roth questions on the phone. You must give the question to their representative and wait for a Roth specialist to call you back. I have been waiting.
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<< I just learned that the $2000 Roth contribution I made for 1999 is invalid because of my 1999 AGI. This $2000 is now worth $3200 and is part of an account at a mutual fund that also holds my 1998 contribution. If I remove this $3200 from the account, I know I must report the $1200 earnings as regular income. But, is there any penalty? >>

You would pay premature distribution penalty on the earnings if you're under 59 1/2.

I think a better choice is to "recharacterize" the contribution and earnings as a traditional IRA contribution. That way you can leave it all under the IRA umbrella and pay no tax currently on the earnings. See Form 8606 and its separate instructions. There's also a lot of information about recharacterizations in the FAQ.

TMF ExRO
Phil Marti
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<<I have read a significant amount of IRS literature on the Roth, but cannot find a specific answer to this. I called the IRS, but they do not answer Roth questions on the phone. You must give the question to their representative and wait for a Roth specialist to call you back. I have been waiting.>>

It's explained in MUCH detail in my series of articles on the Roth IRA in the Taxes FAQ area. Check it out.

As Phil points out, you can either take the money and run (and pay taxes and penalties on the earnings), or do a recharacterization back to a traditional IRA, dodge the taxes and penalties and move forward. I'd suggest the latter.

TMF Taxes
Roy
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