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URL:  https://boards.fool.com/this-roth-ira-is-driving-me-crazy-i-am-10610636.aspx

Subject:  Re: IRS said I couldn't Date:  2/19/1999  12:25 AM
Author:  TMFTaxes Number:  10527 of 129792

[[This ROTH IRA is driving me crazy!!!
I am single, contributed (not converted) $2,000 to a Roth IRA in 1998 which, in
turn, had a 61.5% gain in 1998. My 1998 AGI was about $107K. I also have a
401K plan with my employer.]]

So far so good...except for the fact that your $107k AGI puts you in the "phase out" range with respect to your Roth IRA contribution. So that'll be a problem.

[[ I called the IRS & asked them about "reconstructing" the entire amount into a
regular non-deductible IRA and was told I couldn't do this because of my
earnings & because I have a 401K plan with my company.]]

I think that you mean "recharacterize" your Roth IRA back to a traditional IRA. And there is no reason that you can't...regardless of the bad information that you were given by the IRS.

[[ I'm at a total loss on how to handle this. Do I just rescue what I can & leave it in
the Roth, using the phase out method? If so, what do I do with the $2K that was
already taxed? What about the gain? If I have to sell the stock, will the gain need
to be applied to 1998 taxes?
I hope someone can understand my confusion & help me through this mess. I'm
not sure if I've even covered all the issues.]]

If you DO want to keep some of it in the Roth IRA (it won't be much), you'll have to do some fancy computations. If you want to make your life easier, you can simply recharacterize the whole thing to a traditional IRA (non-deductible). That will make the earnings "taxable" in the future if you ever try to convert the traditional IRA to a Roth IRA, but it is a LOT better than paying the tax and penalties now on a distribution.

It would see like a recharacterization is in your future.

You can read more about the recharacterization issues in the Taxes FAQ area. Check it out.

TMF Taxes
Roy

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