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Hi, looking for clarification on what to expect. Need layman's terms.

Doing my taxes via TT and encountered my first issue. It seems I am not eligible for a Roth as our income exceeds the limit this past year. TT mentioned that I need to withdraw the excess amount (I put in $2000) I went ahead updated TT that I did not make contribution and I noticed it gone and also the 6% penalty. Have not submitted taxes yet.

Now what I decided to do is withdraw the amount ($2000) and am aware that any earnings from that will too get deducted and also I will pay a 10% penalty on withdraw of earning. (ex. $2000 contribution for 2006, earnings was $400 and penalty will be $40 so I should get from them $2360)

Question, do I get anything from mutual fund to apply for this year's taxes (1099-R???) this is what I am not clear on. If I am to get something and have to wait to receive to update my taxes.

Also to throw a twist, I am also withdrawing my contributions from this yr ($100). Again, do I get anything for that?

thanks

WW
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Now what I decided to do is withdraw the amount ($2000) and am aware that any earnings from that will too get deducted and also I will pay a 10% penalty on withdraw of earning. (ex. $2000 contribution for 2006, earnings was $400 and penalty will be $40 so I should get from them $2360)

Not quite. The IRA custodian will give you the full amount of your excess contribution and earnings - $2400 in your example. You need to include the $400 of earnings on your 2006 tax return. The tax and penalty will be calculated and submitted with your 2006 tax return.

Question, do I get anything from mutual fund to apply for this year's taxes (1099-R???) this is what I am not clear on. If I am to get something and have to wait to receive to update my taxes.

You will, but not for another year. About a year from now, you will get a 1099-R showing the withdrawal. That is because the withdrawal happens in 2007. But it will be coded to show it as a withdrawal of excess 2006 contributions and earnings. You will not report this at all on your 2007 tax return.

So you need to pay attention to the documentation that comes with the withdrawal and report the correct amounts on your 2006 return on your own.

Also to throw a twist, I am also withdrawing my contributions from this yr ($100). Again, do I get anything for that?

Yep. A 2007 1099-R, this time coded to show it as a withdrawal of excess 2007 contributions and earnings.

--Peter
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Hi, looking for clarification on what to expect.

Peter has explained the process of withdrawing the excess thoroughly. I just want to make sure you're aware of your other option, which is to "recharacterize" the contribution as a nondeductible traditional IRA contribution.

The advantage of doing this is that the earnings aren't taxed until withdrawn in retirement. In addition, there may be opportunities to convert to Roth down the road.

If you want to go that route, just tell your custodian you want to recharacterize to traditional and tell TT that you made a $4,000 traditional IRA contribution. You should wind up with a Form 8606 showing the contribution in Part I. (TT will need to know if you have ever made nondeductible traditional IRA contributions before.)

Phil
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Hi,
Thank you so much for explaining what to expect.

Follow up question to your reply -

Not quite. The IRA custodian will give you the full amount of your excess contribution and earnings - $2400 in your example. You need to include the $400 of earnings on your 2006 tax return. The tax and penalty will be calculated and submitted with your 2006 tax return.

How do I report the $400 in earnings? Do I report it as a capital gain (ie treat like I received 1099-div or a 1099-b)Or do I report it as a income and enter it as a 1099-R

Also am aware of the option to recharacterize to trad IRA but what I have is a rollover IRA and keeping track of it will be a bit much I think.

Thanks

WW
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How do I report the $400 in earnings? Do I report it as a capital gain (ie treat like I received 1099-div or a 1099-b)Or do I report it as a income and enter it as a 1099-R

It winds up on line 15 of your 1040. If you're using sofware, dummy up a 1099-R with a code 1 in box 7.

Also am aware of the option to recharacterize to trad IRA but what I have is a rollover IRA and keeping track of it will be a bit much I think.

We think differently. All that's required is that you report the nondeductible contribution, then when you take withdrawals calculate the taxable portion of each year's withdrawals.

Phil
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How do I report the $400 in earnings? Do I report it as a capital gain (ie treat like I received 1099-div or a 1099-b)Or do I report it as a income and enter it as a 1099-R

Phil got that one for you. Again using your example numbers, you would report a total withdrawal of $2400, with $400 of it taxable.

Also am aware of the option to recharacterize to trad IRA but what I have is a rollover IRA and keeping track of it will be a bit much I think.

You would have to keep track of the non-deductible contribution to a traditional IRA. You could simplify the investment tracking by transferring the recharachterized money to your current traditional IRA custodian. There would be no reason to keep it separate, unless you need to do so for investment reasons.

--Peter
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Hi, looking for clarification on what to expect.

Peter has explained the process of withdrawing the excess thoroughly. I just want to make sure you're aware of your other option, which is to "recharacterize" the contribution as a nondeductible traditional IRA contribution.
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This is exactly what I did with all of my 2006 contributions across 5 different trustees for me and my wife. Plus, 1 trustee stated that I need to calculate the earnings on my deposits. OK< I did it, and then had them recharacterize that amount too.

The paper trail is what is tough but if you methodically track each transaction , with account numbers, then it's not a problem, just a hassle.

I intend to convert them to ROTH accounts in 2010, along with the funds I put into the accounts (the new nondeductible traditional IRAs) in 2008 and 2009 plus the catchup contributions I can make starting in 2008, as well as my wifes funds too. Spreading the tax payments out over 2 years....

Unless they change the rules again.

MZ4
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