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On a Roth, if you have contributed during the year and find at the end that you exceed the AGI rule (either partial or 100%), I know, of course, you pay taxes on the contribution - thats a ROTH. I also figure you'll have to pay taxes on the interest earned in the year you exceeded AGI (another question, another time) BUT do you have to take the money out or can you leave it in?

I'm assuming the AGI rule applies yearly. Also realize in this case we are not qualified to participate in a traditional IRA.

Thanks for the wealth....of information.

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Actually you can participate in a traditional IRA, you just cannot take a deduction on your taxes. You will need to recharacterize the contribution from a Roth to a Traditional IRA. Thus you will pay taxes on the contribution, but it will remain within the T.IRA.

jbw
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Greetings, Goldstucker, and welcome. You asked:

<<On a Roth, if you have contributed during the year and find at the end that you exceed the AGI rule (either partial or 100%), I know, of course, you pay taxes on the contribution - thats a ROTH. I also figure you'll have to pay taxes on the interest earned in the year you exceeded AGI (another question, another time) BUT do you have to take the money out or can you leave it in?>>

If you exceed the AGI limit for the Roth contribution you must take that money and its earnings out of the Roth no later than the due date of your income tax return for that year. That's usually April 15, but next year it will be April 17 because the 15th falls on a weekend day. If you fail to do so, then you will be penalized 6% on the excess contribution for the year, and that penalty will continue each and every year until the excess is removed.

The IRS says, though, that you may recharacterize that contribution as one made to a nondeductible traditional IRA prior to April 15 (or 17 for next year), and all will be well with the world. So, if you're in that situation, simply notify your IRA custodian and tell that agency you wish to have the contribution recharacterized as one made to a a regular, traditional IRA instead of to a Roth. That contribution and its applicable earnings will then be moved to a traditional IRA.

<<I'm assuming the AGI rule applies yearly. Also realize in this case we are not qualified to participate in a traditional IRA.>>

Yes, the AGI limit is a yearly one, but even if you exceed it you still always have the option of using a nondeductible traditional IRA so long as you have the earned income to do so and are under the age of 70 1/2.

Regards..Pixy
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The IRS says, though, that you may recharacterize that contribution as one made to a nondeductible traditional IRA prior to April 15 (or 17 for next year), and all will be well with the world.

IIRC, the deadline for recharacterizing is Income Tax Day (i.e. April 15/17), even if you file for an extension. Is that correct, or is my memory playing tricks on me?

JDOyster
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JDOyster asks:

<<IIRC, the deadline for recharacterizing is Income Tax Day (i.e. April 15/17), even if you file for an extension. Is that correct, or is my memory playing tricks on me?>>

That is correct.

Regards..Pixy
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So, to sum up. If you exceed the Roth AGI, you can recharacterize the contribution as a non-traditional IRA contribution (which would be part of your taxable income - because you have exceeded all AGI requirements) but would still acumulate interest tax free until distribution (assume this because its call a non-tradition IRA).

Does this require a new account to be setup (Roth, IRA, Non-traditional IRA)? How do you bookkeep that taxed contribution. You've already paid taxes on it. You shouldn't have to pay taxes at distribution. Do you keep a copy of tax return with account statement? Your co-mingling taxed deferred and taxed contributions. Yes you can recharacterize but were do you move the money?
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Forgot to say thank you for the helpful info.

Cheryl (please excuse any typo/grammer errors)
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Cheryl asks:

<<So, to sum up. If you exceed the Roth AGI, you can recharacterize the contribution as a non-traditional IRA contribution (which would be part of your taxable income - because you have exceeded all AGI requirements) but would still acumulate interest tax free until distribution (assume this because its call a non-tradition IRA).>>

Your understanding is correct.

<<Does this require a new account to be setup (Roth, IRA, Non-traditional IRA)? How do you bookkeep that taxed contribution. You've already paid taxes on it. You shouldn't have to pay taxes at distribution. Do you keep a copy of tax return with account statement? Your co-mingling taxed deferred and taxed contributions. Yes you can recharacterize but were do you move the money?>>

No, you don't have to establish a new IRA to receive the recharacterized contribution. You do, though, have to notify the traditional IRA and the Roth IRA providers in writing prior to moving the cash that you wish to take that action. The letter must contain some specific information for the successful completion of that action. Rather than going through the litany of how to do all that, I'll just refer you to the best information on the web concerning that topic. That can be fund at the Fairmark Press site at http://www.fairmark.com/rothira/rctop.htm. Read the series of articles there, and you will have a good idea of all that's required.

The only other thing to keep in mind is that when you file your income tax for the year, you must include Form 8606 to show the nondeductible contribution to your traditional IRA that year. Keep that form forever as it becomes your proof you made such a contribution later when you begin withdrawals from the traditional IRA. It ensures you will not be taxed on that money again. See IRS Publication 590 (Individual Retirement Arrangements) for details.

Regards..Pixy
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I will have qualifying w-2 and 1099 income this year. I do not have a current retirement plan.

I want to set up a SEP, a qualified IRA, and a non-deductible ROTH. Can I do this?

Can I contribute to the non-deductible Roth with stocks at their original purchase basis and then trade in this account to avoid taxes for the year of the trade?

Can I over contribute to the non-deductible Roth in order to avoid paying taxes on stock sales?

Thank you
Ann Marie
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Greetings, Ann Marie, and welcome. You wrote:

<<I will have qualifying w-2 and 1099 income this year. I do not have a current retirement plan.

I want to set up a SEP, a qualified IRA, and a non-deductible ROTH. Can I do this?>>


Yes, but with some caveats. The SEP-IRA can be used to contribute up to an effective 13.0435% of your comensation or $24K, whichever is less. You may also contribute to either or both a traditional IRA or a Roth IRA. The contribution to a traditional IRA may or may not be deductible depending on your filing status and adjusted gross income. (See our IRA area at http://www.fool.com/Money/AllAboutIRAs/AllAboutIRAs.htm for these limits.) A contribution to a Roth depends on your filing status and AGI as well. If all you can make is a nondeductible contribution to an IRA because of the SEP, then the Roth is generally your best choice. If you decide to contribute to both a Roth and a traditional IRA, then you may not contribute more than $2K combined to both ($1K to each, Or $1 to one and $1,999 to the other.)

<<Can I contribute to the non-deductible Roth with stocks at their original purchase basis and then trade in this account to avoid taxes for the year of the trade?>>

No, you may not contribute anything but cash to an IRA, regardless if that's a Roth IRA or a traditional IRA.

<<Can I over contribute to the non-deductible Roth in order to avoid paying taxes on stock sales?>>

No, you may not. Excess contributions incur a 6% penalty per year each and every year until they are removed from the IRA.

Regards..Pixy
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Goldstucker writes (in part):

Does this require a new account to be setup (Roth, IRA, Non-traditional IRA)? How do you bookkeep that taxed contribution. You've already paid taxes on it. You shouldn't have to pay taxes at distribution. Do you keep a copy of tax return with account statement? Your co-mingling taxed deferred and taxed contributions. Yes you can recharacterize but were do you move the money?

I reply:

You do not need a third account; simply recharacterize Roth IRA contributions (and associated earnings) into any traditional IRA account that you may already have. That account then will have a combination of deductible and non-deductible (because the combination of your participation in a 401(k) and your income renders you ineligible to deduct contributions; if you did not participate in a 401(k), your contributions would be deductible) contributions. As you correctly infer, your non-deductible contributions will give you a basis in the traditional IRA. This is reported annually to the IRS on Form 8606 (in any year for which you have made a non-deductible contribution), which you will include with your tax return. --Bob
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