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If you will be eligible to make 2007 Roth contributions you can leave things as they are, pay the penalty for 2006, and "apply" the 2006 excess to your 2007 contribution. This means that you would reduce your allowable 2007 contribution by the amount of the 2006 excess.

I fully funded both Roth accounts, 5K for me and 4K for DW. I've already started funding for 2007 also. Me thinks this won't work.

To avoid the penalty you have two choices with respect to the contribution and the earnings on it. In both the contribution and earnings travel together. You can either withdraw it or recharacterize it as a traditional IRA contribution. You can read up about these options in Pub 590.

Does this mean there are no "MAGI" limits for a traditional IRA? If not, then converting the 2006 contributions and earnings to traditional would seem to be the way to go. These were both new Roth accounts opened at Vanguard in 2006 so whatever the share balance was on 12/31/06 is what would have to be moved to a traditional IRA.

If you don't leave things as they are, once you've decided what you're going to do you must abandon the interview mode in TurboTax and deal with forms if you want a prayer of getting it right. Let's just leave things where they are until you decide your course of action. Then start a new thread and we can help you with how to deal with it on your return.

I didn't save the changes to the return after entering the IRA data so I can start from that point once I get things straightened out.

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