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In my ROTH there were gains on the 4000, in the neighborhood of 6.5% over the year. I suppose paying the 6% penalty, $240, makes it a wash, probably better and easier than going through the act of withdrawing funds, declaring the income and paying a penalty. I will have earned income in 2007, so I suppose leaving it alone makes the most sense.

Let's calculate those penalties correctly before you go making any decision.

The excess contribution penalty would be 6% of $4000 or $240. But to withdraw the excess contribution and earnings would mean you pay tax and penalty on the earnings only. Since you earned about 6.5%, that would translate into about $260. So you'd pay tax on $260 at, say 25%, or $65. And the penalty would be 10% of $260 or $26. That totals up to $91 of tax and penalty for the withdrawal option.

In my wife's account the 4000 bought Johnson and Johnson's which for the year showed a slight loss. At first glance I thought it made sense to withdraw, pay the under 59 penalty and start fresh this year, BUT, $400, the 10% penalty, would be higher than the 6% excess contribution penalty.

Don't forget to include the dividends in you calculus. And while I'm thinking about it, are there any previous contributions or conversions in these Roth accounts? Or is the only thing in the accounts your 2006 contribution? If there are other funds in the account, you don't get to just look at what you bought with your 2006 contribution. You have to look at the total value of the account to figure up the earnings to withdraw. That could have a big impact on your figuring.

But assuming you have the easier situation of there not being any other funds in your wife's account, she would not have a penalty for withdrawing her excess contribution and earnings. Only the earnings would be penalized. But there are no earnings. So there is no penalty.

Just some food for thought.

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