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When doing my taxes for 2009 I found that I had hit the income limit where my Roth contribution is getting phased out. So there was an over-contribution of about $2000. I understand that one of my options is to pull this extra contribution out along with the gains made, to avoid paying the 6% penalty on the contribution.

However, the gains on this had been very good this year (thanks HG!) so rather than pull it and the gains out or recharacterize them to Traditional IRA, I'm choosing to just pay the 6% penalty on the over-contribution, and I understand that I can count the $2000 overpayment towards my 2010 IRA contributions.


You make this sound like an opportunity. Having peeked ahead, maybe I can start helping you straighten things out in your mind if I remind you that this is a cost of your decision to leave the 2009 Roth excess contribution as it is. It reduces your allowable 2010 combined traditional and Roth contribution to $3,000.

Since that $2000 of my 2009 contributions will now be assigned to 2010, that means I only contributed around $3000 total to my IRA accounts for 2009.

Bzzz! No, you contributed $5,000 for 2009. Since you're leaving it alone even though it was excess with respect to Roth income limits it still counts against your 2009 $5,000 total. The excess also counts against your 2010 contribution limit if you don't want another excess contribution penalty for 2010. Thus, if you don't fix this the total you can contribute, Roth and traditional combined, for 2009/10 is $8,000. See Part IV of Form 5329.

Now a question. Will you be eligible to make Roth contributions of at least $2,000 in 2010? If not, you're going to be back in this same mess a year from now. It might be a good idea to recharacterize the excess and keep that $120 working for you rather than Uncle Sugar, plus you'd be able to make a full $5,000 conribution for 2010.

Phil
Rule Your Retirement Home Fool
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