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Greetings, Boardhead, and welcome. You asked:

I was a part-time employee for the first half of 1998. My husband does not have earned income. My employers have a SIMPLE IRA plan to which employees can make a maximum contribution of $6,000.00 per year. At the beginning of the year, I opened Roth IRA accounts for my husband and myself and we contributed $2,000 to each from our savings. I understood that we were allowed by law to contribute to both Roth IRA accounts and the SIMPLE IRA plan at my place of employment. I contributed the maximum of $6,000 to my SIMPLE account. Later I quit my job.

My question is: Are our contributions to these three IRA accounts limited to the total of my earned income for the year? As it turned out, I quit my job before I earned the total amount that I contributed to the three accounts. If I have contributed too much (contributions to the three accounts total $10,000) to these accounts because my earned income was less, what do I do about it now?

Yes, the combination of all three contributions may not exceed your earnings from employment. In this instance, because you failed to earn enough to cover all of your SIMPLE and Roth IRA contributions, you must make a corrective withdrawal prior to your tax date to avoid paying a 6% penalty on the overcontribution(s). The question for you is from which accounts the withdrawal should come.

If you earned enough on your job to cover the $6K contributed to the SIMPLE, then IMHO you should leave that account alone to continue the tax deferral on that money. However, if you only earned $5K but contributed $6K, then you should contact the plan administrator and request a distribution of the $1K excess contribution before you must file your tax return for the year. You need to remove only the excess because you are allowed to contribute 100% of your pay up to a maximum of $6K in a SIMPLE. You will have to declare any excess you withdraw as income, but you will avoid the 6% penalty that way. In this case, you will also have to close both Roth IRAs. In the latter, you won't be penalized on the excess contribution, but you will have to pay taxes and an early withdrawal penalty of 10% on any earnings generated from the original deposits. The bill on that should be relatively small. If you are o.k. in the SIMPLE, then all you must do is withdraw any remaining excess from one or both of the Roth IRA to avoid the 6% penalty.

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