Excess Roth IRA Contribution for 2007…
Early 2007, taxpayer contributed to a ROTH IRA.
Prepared and filed tax return by April 15, 2008.
Taxpayer realized MAGI was too great to make any ROTH IRA contributions.
Taxpayer now wants to change this to a Non-Deductable TIRA.
Taxpayer has until October 15, 2008 to do make this change.
What must the taxpayer do to accomplish this task?
Specifically what happens to the gains in the ROTH IRA?
Permalink Submitted by Alan Spross on Fri, 2008-06-27 21:53
Taxpayer just needs to contact the Roth custodian and request that the 2007 Roth contribution be recharacterized as TIRA contribution. The custodian should calculate the allocated gain or loss and the net amount will be transferred to a TIRA selected, but if the taxpayer has none, he will need to open one to receive the transfer. This cannot be done by rollover.
He will then have to file a Form 8606 to report the added basis in his TIRA from the non deductible contribution. This amount is not the amount recharacterized, but the original contribution amount made to the Roth. This can be done with a stand alone 8606 without a 1040X.
IF he had large gains (in this market?), he could also opt to pay the 6% excise tax on a Form 5329 and then he would only have to remove the original contribution amount post 10/15 but prior to 12/31 so he would not incur a second 6% tax for 2008. A third option if he will be Roth eligible in 2008 would be to apply the contribution to 2008 on Form 5329 . He would still owe the 6% for 2007 but not for 2008. These latter two choices keep the earnings in the Roth in exchange for the 6% excise tax. In this market it is unlikely the earnings would be large enough to warrant this since it generally works only when the earnings are above 25% or so.
Permalink Submitted by Denise Appleby on Fri, 2008-06-27 23:20
If the custodian will not calculate the earnings/losses [url=http://www.retirementdictionary.com/nia.htm%5D( Net Income Attributable or NIA)[/url], the the taxpayer may use the provided in [url=http://www.irs.gov/pub/irs-pdf/p590.pdf%5DIRS Publication 590[/url] and [url=http://www.retirementdictionary.com/nia.htm%5DTD 9056[/url].
Some custodians have gone as far as to include a notice in their IRA agreement to the effect that they will not calculate the NIA.
Permalink Submitted by Clyde Wolf on Fri, 2008-06-27 23:44
Alan and Denise,
Thank you for your inputs.
Permalink Submitted by Diana Davia on Sat, 2008-08-30 19:24
I have a BIG Roth IRA problem. I have been contributing the maximum amount to a Roth on an after “tax basis” since 2000. I have a 401k at my place of employment.
Starting in 2004, my AGI disqualified me from contributing. Now I need to clean up the mess! (I’m disgusted that my investment company didn’t even ask me about my AGI each year and now is deflecting any responsibility, but that’s beside the point.)
I’m getting help from my tax preparer but it seems that there are different answers to the same question.
Here’s what I’m clear about:
1) I need to with draw the excess contributions from each year where my AGI exceeded the limit.
2) I’ll need to pay a 6% penalty for each year each contribution was in the account.
Here are my questions:
3) What about the interest gained on the contributions? Do I need to withdraw that as well? If so, I assume I’ll need to pay tax on the interest gained?
4) If I pull out all excess contributions from previous years before Oct 15, will I owe the 6% for each contribution for the 2007 tax year?
5) Are there any other penalties for pulling it out before age 591/2 (even though it wasn’t supposed to be there in the first place?)
Any advice and thoughts would be greatly appreciated!
Permalink Submitted by Alan Spross on Sat, 2008-08-30 20:37
See your other post for comprehensive reply.