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Greetings, Brwhiz, and welcome. You asked:

How should I resolve this?? Should I transfer $1500 into my Roth for 2002 (and would I need to also recharacterize the contribution since it would be for a different tax year? Could I transfer the remaining $500 to the Roth and recharacterize it for 2003 or would I have to wait until January to do the recharacterization? Or should I just revoke the Traditional IRA (is this possible?), suffer the penalties, and start over in a taxable account. If I transfer the assets directly from the Traditional IRA into a taxable account (without liquidation) can I defer gains taxes until the assets are liquidated out of the taxable account?

Given that the contribution was for tax-year 2001, you will be assessed a 6% penalty on that $2K for that and all subsequent tax-years unless you remove that contribution. To escape that penalty, you must remove the excess contribution (to include any earnings) prior to the deadline of your extension for filing in 2001. You may read up on the details of the corrective actions you may take in IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. See pages 41 and 42 for specifics.

You could leave the contribution in the IRA, pay the penalty, and either move $1.5K to a Roth IRA or leave it where it is, calling that $1.5K a contribution for 2002. You would than still have $500 excess contribution in the original account on which you would pay the 6% penalty in 2002. In 2003, you call the remaining $500 a contribution for that tax-year. Using this procedure, all earning can stay in the IRA without penalty or tax, but you still have to pay the 6% on $1,500 in 2001 and 6% on $500 in 2003. All you would avoid is the income taxation plus the 10% early withdrawal penalty on earnings that applies when you remove the proceeds prior to the filing of your 2001 return.

Lastly, I wish to apologize for any erroneous information I may have posted on this board in the recent past. The information was derived from an investment seminar presented by someone who represented himself as a Certified Financial Planner (and who I found out was just STUDYING for CFP certification).

If what you say is true, the CFP Board of Standards would very much like to learn this person's name and the circumstances involved for potential disciplinary action. Holding oneself out as a CFP licensee is a serious breach of professional standards, and I (as a CFP licensee) highly resent someone who would do so. I urge you most strongly to report this person. For information on how to do so, see http://www.cfp-board.org/cons_cmplt.html

Regards..Pixy
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