Excess Roth IRA contributions?
I am working with a couple who file MFJ. They assumed their gross income for 2008 would be $140K. The wife has contributed $1,200 to a Roth for 2008. She will make $40K in 2008. The husband’s compensation changed so he will now end up making $135K in 2008. So the combined gross income will be $175K which exceeds the $169K limit for 2008. I don’t know what the MAGI will end up being– they are not self employed so they do not have a lot of deductions. The funds she owns in her Roth have lost value. Based on your experience what would be the best option for this couple? Thanks for your advice!
Permalink Submitted by Alan Spross on Wed, 2008-11-12 17:52
They need to be sure that their estimate of modified AGI is correct using the definition of modified AGI. There is plenty of time to correct an excess contribution, so she might as well wait until the MAGI is known, and the same applies to the husband making his contribution.
If even one of them is a retirement plan participant, the MAGI limit is the same as the Roth limit with respect to getting a deduction were they to recharacterize the Roth contribution to a TIRA. Without a deduction, I would take this option off the table.
There is no downside to waiting for the final MAGI figure. Since there is a loss and likely to remain a loss, there will be negative income accompanying the return of any excess contribution. With negative income, there is no additional income to be added to their 2008 return, so they would not even have to hold up their 2008 return waiting for the earnings figure. In summary, wait until Jan or Feb until MAGI is exact, and if still over the max, just ask to have the 2008 excess contribution corrected then. If the MAGI drops down into the phaseout range, then a partial contribution is allowed and the correction would be applied to the remaining excess amount.