too much income for RothIRA after my contribution? what now?
greetings. so, i took a gamble and dumped $4k a year ago into my RothIRA, but unfortunately (fortunately) i will report more than the $156K cut-off for joint-filers.
what do i do now?
any help appreciated.
thanks,
-M
Permalink Submitted by Alan Spross on Wed, 2008-01-16 21:29
Assuming the contribution was for the 2007 tax year, you should determine how much your excess contribution was, and the same treatment would apply to any Roth contribution made by your spouse. If you joint modified AGI was in the phaseout range between 156k and 166k, you would each be allowed a partial Roth contribution and would have to withdraw the excess. There is a worksheet on p 61 of Pub 590 to calculate the partial contribution allowed.
If over 166k, then the entire contribution is excess and must be removed with allocated earnings or less allocated losses. The IRA custodian can usually make that calculation. Tell the custodian that you must withdraw an excess contribution of $x plus the earnings they calculate. If you have earnings, the earnings are taxable on line 15b and subject to penalty. You should do this now, so you can report the income on your 2007 return. You will not get a 1099R for this until Jan, 09, but if you take care of it this year, you will not have to address it at all on your 08 return.
Permalink Submitted by Denise Appleby on Sat, 2008-01-19 15:44
If the custodian does not perform these calculations, you may refer to TD 9056 for instructions on how to determine the NIA amount. See http://www.retirementdictionary.com/nia.htm
Permalink Submitted by Margaret Stallworthy on Sat, 2008-01-26 17:16
Consider the possibility of recharacterizing the contribution (and attributable earnings) to a Traditional IRA. If you do not have an employer plan, there is no income limit on deductibility.
If you have employer plan coverage and are subject to limits on deductibility then you may have a non-deductible contribution which you will have to report on your tax return and track.
But when you recharacterize instead of withdrawing, there is no tax on the earnings because you don’t actually take them out – they just move over to the traditional IRA account.
Take a look at pages 29 and 30 of IRS Publication 590 for more information on recharacterization.
Be sure to be VERY clear with the custodian – they are getting better at this, but they still make mistakes and process a withdrawal & contribution instead, and that messes up everything.
In a couple of years when the income limits on Roth conversions have gone away, you can convert the traditional IRA to a Roth. If you didn’t get a deduction for it in 2007, you will only pay tax on the built-up earnings. If it was a deductible 2007 contribution, you’ll pay tax on the whole thing at the time of conversion.
This gets more complicated if you already have a Traditional IRA in which the contributions were deductible at the time they were made – in that case, a Roth conversion of part of the account would lead to pro-rata taxability, but that is beyond the scope of your present question.