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Subject:  re: Roth IRA and SIMPLE IRA Contribution Limits Date:  10/5/1998  9:50 PM
Author:  Boardhead Number:  5862 of 107495


I appreciate your response to my question posed on 9-27-98 (?) regarding contribution limits for a SIMPLE IRA and Roth IRAs for 1998.

<...In this case, you will also have to close both Roth IRAs. In the latter, you won't be penalized on the excess contribution, but you will have to pay taxes and an early withdrawal penalty of 10% on any earnings generated from the original

I couldn't find the logic in having to pay a 10% penalty on any potential gain if we withdrew our excess contribution within the proper amount of time. So, I delved into the matter further on my own and thought I should share the information.

At the IRS website I downloaded Publication 553. In Chapter 3, 1998 Changes, Roth IRA, the IRS says that excess contributions can be "withdrawn penalty free if they are withdrawn on or before the due date (including extensions) for filing a tax return for the year." However, under the section of the publication that deals with Education IRAs it said, "The 10% additional tax also does not apply to a distribution that is a return of an excess contribution. For the additional tax not to apply, the distribution must be made before the due date of the contributor's return (including extensions) and it must include any net income attributable to that contribution. That net income also must be included in the contributor's gross income for the tax year the contribution was made."

To verify that the above quote applied to Roth IRAs other than Education Roth IRAs, I called the IRS. I was told that the 10% penalty would not apply to us, whether or not our Roth's were education Roth's. I was told that in Publication 590 on page 14, there is a section applying to tax free withdrawal of excess contributions to IRA's. (I haven't looked this up, however.) The man I spoke to said that rules for Roths are the same as for traditional IRAs concerning premature withdrawals and that the 10% penalty in question does not apply as long as we withdraw both the excess contribution as well as any income generated from them by the proper time.

Now I have an even more complicated additional question. The money ($2,000.00 each) that my husband and I each contributed to our Roths in early 1998 that we will need to withdraw before, say, April 15th of 1999, was invested in two Foolish Four stocks on February 4th, 1998. The IRS man told me that any "gain" that those stocks had on the date we might transfer those stocks to our joint (taxable) securities account (assuming we do so before filing our 1998 tax return) would be treated as ordinary income for 1998. At the moment, we have a gain on one of them and a loss on the other. I have never heard of a "loss" to ordinary income and don't even know how one reports it on a tax return! I don't understand why any "gain" shouldn't be taxed at the 20% rate if we were to wait until February 5th. In your opinion, would we be better off if we wait until February 5th of 1999 to sell or transfer to our taxable securities account (if one or both are still on the Fool 4 list) these 2 stocks of our Fool 4, or to take care of the transfer of stock to our "taxable" brokerage account now? I appreciate any insight you may have.


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