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minnat wrote:
How do you remove the excess? Suppose you start a Roth in January and then make too much money that year to be eligible (happy days!). Do you back out the contribution + whatever gain you have made on it into some other account? Do you have to sell whatever you invested it in to do that?

What you describe is similar to what I'm experiencing, although different than the original post's situation. The answer is yes, you can back out your excess contributions, plus the gains on them, selling whatever you want to until you have enough cash to withdraw the correct amount (remember, except in the case of rollovers or transfers all assets going into or out of an IRA must be in the form of cash). There is a formula for doing this, and all the rules and the whole procedure is outlined in IRS Pub. 590, available for viewing on-line at the IRS web site.

The contributions that you back out are treated as if you had never made them (i.e. for a traditional IRA you can't deduct them on your tax return - for a Roth nothing happens). You will have to pay tax on the gains, however, and Pub. 590 tells you how to do that.

You might want to see my post on the Tax Strategies board, although my situation is more complicated than this one, and what I want to do is rather confusing, though perfectly legal. This situation corresponds roughly to Part One of my problem. The post is

The possibility of having to back out is why I will never again make contributions prior to figuring my taxes. I used to make regular monthly contributions. Now I'll just save up cash over the course of the year, then contribute the max I'm permitted all at once.

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