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Example #1: Bill, who is 25, makes a Roth IRA contribution of $2,000 this year. Seven years later (well beyond the five-tax-year period), Bill closes his Roth IRA and takes a distribution in the total amount of $4,500 (representing the original $2,000 contribution and $2,500 in earnings). Bill is not disabled, nor does he use these funds to pay first-time homebuyer expenses. Since Bill is NOT over age 59 1/2 when he takes the distribution, the distribution is NOT qualified. Bill will owe income taxes on the $2,500 of earnings. Additionally, Bill will be assessed a 10% early withdrawal penalty on this $2,500 of earnings unless he meets one of the other six authorized exceptions for avoiding that penalty. Ouch.

Remember that, under the Roth IRA rules and unlike the rules for a regular IRA, you can first remove your contributions without tax or penalty. So, in Example #1 above, if Bill decided to take a withdrawal of only $2,000, it would be treated as a distribution of his original contributions, and would not be subject to taxes or penalties. That only makes sense since Bill didn't get to deduct that contribution from his taxable income when it was originally made (so, he's already paid income tax on the money).

IRS publication: - Worksheet 2-3 is probably mostly zeros for you, but will give you a formal answer.

I spotted one thing in pub590 that confused me. It said that excess contribution in a year could just be put against future years - page 57. It mentioned nothing about that needing them to be within the normal contribution period. It said nothing about needing to pay penalties or taxes or withdraw earnings w/ penalty, so long as your contributions for that year are then less than your max. Now there's probably a phrase somewhere else (I didn't read the whole pub), but where does it say I can't just contribute $9000 on Jan 1 of next year and consider it my 2006 and 2007 contributions? It seems to imply I could.
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