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Okay, so I had no idea that there were AGI income limits attached to Roth contributions - my own fault.

2001 I have to pro-rate my contribution,
2002 I took a lot of time off so my income was waaay down - so that year is okay.
2003 & 2004 I shouldn't have contributed anything. I think for 2004 I might okay on penalties b/c I have filed an extension, though already submitted my taxes (according to my discount brokerage house no penalties should result b/c of extension - but who knows)

My accountant is going to need to file amended returns, but I'm wondering if anyone has any advice here - is there anything I can do to reduce the pain here? xfer to traditional ira or anything like that?
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Okay, so I had no idea that there were AGI income limits attached to Roth contributions - my own fault.

2001 I have to pro-rate my contribution,
2002 I took a lot of time off so my income was waaay down - so that year is okay.
2003 & 2004 I shouldn't have contributed anything. I think for 2004 I might okay on penalties b/c I have filed an extension, though already submitted my taxes (according to my discount brokerage house no penalties should result b/c of extension - but who knows)

My accountant is going to need to file amended returns, but I'm wondering if anyone has any advice here - is there anything I can do to reduce the pain here? xfer to traditional ira or anything like that?


The only year you have any choices on is 2004. For all earlier years you must withdraw the excess contributions. That's withdraw, not covert or recharacterize or allocate or anything else that indicates you have any choice other than fully removing the excess contributions and the earnings on them from the IRA umbrella. You also owe 6% excess contribution penalty for each year the excess was in there. (If you haven't made a 2005 contribution and expect that you can, you could apply the 2003 excess to your 2005 contribution and not withdraw it. Since nothing about this was reflected on your prior year returns, there's no need for amended returns. The penalties can be paid on Form 5329, which can be filed by itself.

For 2005 you'll have the Roth distributions to report. Only any amount in excess of your total Roth contributions will be subject to tax and the 10% penalty. See Part III of Form 8606.

Now, 2004. You can withdraw the excess and the earnings anytime before your extended due date. Earnings are subject to 2004 tax and the 10% early distribution penalty, so if you go this route you'll have to amend 2004. Your other choice is to "Recharacterize" the 2004 as a traditional IRA contribution. If it's nondeductible you'll need to File a Form 8606, Part I to establish the IRA's basis. If it's deductible you'll need to amend your 2004 return to take the deduction.

Details about all this are in Publication 590 and the instructions for Forms 5329 and 8606.

Phil
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Phil,

Excellent - exactly the kind of feedback I was looking for. VERY helpful - thank you.

For 2005, I believe I will hold off so that I don't find myself in the same situation. The 2004 recharacterization sounds very appealling and the best solution even if it is not tax deductible.

One question - who determines if I had earnings on the excess Roth contributions? Does the brokerage house determine this or do I need to figure out if that particular contribution generated any return? If I was sitting on cash, then made the contribution, bought some stock, then sold some stock it seems murky as to whether or not that particular contribution generated a return, no? I have to take a closer look I guess and see just how clear cut this is.

-AF
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If you haven't made a 2005 contribution and expect that you can, you could apply the 2003 excess to your 2005 contribution and not withdraw it"

Wait a minute - just re-read that and it sounds very appealling. Why am I able to do this for 2003? Isn't it too late? Is that my only option there? I guess I'm taking the chance that if I do not fall under the limits I will owe additional penalties for another year then?
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One question - who determines if I had earnings on the excess Roth contributions? Does the brokerage house determine this or do I need to figure out if that particular contribution generated any return?

Ultimately, you do. The brokerage may or may not assist you with the calculation, but as far as the IRS is concerned, you are responsible for the calculation.

If I was sitting on cash, then made the contribution, bought some stock, then sold some stock it seems murky as to whether or not that particular contribution generated a return, no?

I believe that same publication 590 talks about this calculation. You do not try to calculate the earnings on a specific contribution.

You take a look at the value of the account at the time of the contribution, and again at the time of withdrawal. The change in value is allocated proportionally between what was already in the account and your contribution. The specific investments are not relevant.

--Peter
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Wait a minute - just re-read that and it sounds very appealling. Why am I able to do this for 2003? Isn't it too late? Is that my only option there? I guess I'm taking the chance that if I do not fall under the limits I will owe additional penalties for another year then?

Yes to your last statement. You pay the excess contribution tax until you withdraw the excess or can apply it to current year contributions. I'm pretty sure that calculation is covered in either Pub 590 or the 4xxx or 5xxx (I can never remember that form # without looking it up)instructions, but it's the one other than the 8606 that I mentioned initially.

Phil
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