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Hello, Lhdill---

I've been in a similar spot. With the usual "I'm no expert on taxes" disclaimer, here's what I think I know :

You need to remove the excess contribution plus earnings before you pay your 1999 taxes. Report the earnings as dividend/interest/whatever it was. You owe a 10% penalty on the earnings ONLY. You have no other obligation, since you're not claiming any tax deduction for the contribution.

Your end-of-year 1099 for this account should show an untaxed distribution of $221 + earnings (for which, if anyone asks, you need only demonstrate that it was excess removed before the tax date) and should identify the earnings amount as subject to tax.

I believe your tax obligation is incurred for the year the funds were credited to the account--in your case, for 1999, the year they were recharacterized.

Another possibility: If you haven't yet made a 1999 IRA contribution and you qualify for one, you can recharacterize the excess as a regular IRA contribution and keep the earnings. Nothing to report but the recharacterization. No tax, no penalty, nada.

Run this past TMFTaxes on the Tax Strategies board, for your own peace of mind. It's a small sum to get gray hairs about, matters more to you than to the IRS.


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