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In January, I opened Roth IRAs for both my husband and myself and deposited $2k each. Then the company we both work for was acquired, and he was downsized. Between my unexpected project bonuses and his generous severance package, we might exceed the $150k AGI limitation, although it would be close. (I never thought that making TOO much money would be a problem!)

One thing I've thought of doing is maximizing our contributions to the 401k. We currently contribute 4% each, to get the company match. We don't contribute more because of the generally poor-performing investment choices in the plan.

If we did exceed the AGI limitation, what would I have to do, by when, in order to avoid tax consequences and penalties? Or is it already too late?

You have until your filing date of April 15, 1999, to make an IRA election. Therefore, if you determine on 12/31/98 that you have exceeded the $160K limits for a Roth contribution, you may have the account redesignated as a tradition, nondeductible IRA or just withdraw all the money to include earnings. If you do the latter, you must declare the earnings as income and apply those earnings to the applicable tax year (i.e., 1998 and 1999). The IRA custodian can help you do that.

Pixy's response is excellent and I'll just add some minor points. First, Pixy mentions "an IRA election," and loosely speaking that's what it is, but to be more precise you're required to elect the type of IRA at the time you establish it but have the opportunity to make a corrective conversion by the return due date. Second, this corrective procedure isn't in the law yet but almost surely will be within a few weeks when Congress finishes work on technical corrections (as part of the IRS restructuring legislation). Third, if the contribution is withdrawn, together with earnings, as a corrective distribution prior to the due date of the return, the earnings are all considered taxable in 1998 even if some of the earnings accrue in 1999. And last, I have a web page on this subject:

KAT in Chicagoland
Tax Guide for Investors
Includes a complete guide to Roth IRAs
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