Close to the income limits for Roth IRA
Hi,
I’m very close to the income limit for a full Roth IRA contribution this year. I would usually wait until the end of the year to see if I have exceeded the income limits before I make any contributions, but with the stock market increasingly appearing to have bottomed, I would like to take advantage of the opportunity to make some investments with a new Roth contribution. If I make a full contribution now, and find out later that it was too much, what forms do I need to fill out to get squared away with the IRS? Can I just withdraw the excess and call it good? Is there anything else I need to do?
Thanks!
Permalink Submitted by Alan Spross on Wed, 2009-07-01 23:58
If you make the contribution now, you will have several options in resolving it. If the market rises and you want to preserve the gains, you could recharacterize the contribution as a traditional IRA contribution, in most cases a non deductible one which you would report on Form 8606. You can then convert as much to a Roth as you wish in 2010, when there are no longer conversion income limits. If this is your only TIRA, the conversion would be mostly tax free. If you have other TIRA accounts, the pro rate rules apply which would result in the conversion being mostly taxable. But at least your gains stay in the IRA, and eventually end up in a Roth.
If you knew you would be eligible for a Roth in 2010, you could also just leave the contribution and the earnings in the Roth and pay the 6% excise tax. The excess amount would be applied to your 2010 contribution on Form 5329. You need hefty gains to make this worth paying the 6%.
The usual solution is just to contact the IRA custodian and tell them the amount of the excess contribution. The custodian figures the earnings or loss and send you a check for the net amount. Any earnings are taxable and subject to penalty. If you happen to end up in the phaseout range, the corrective distribution with earnings can cause you to still be in excess because the earnings are taxable in 2009 and the earnings increase your income causing another amount of excess. If you think you will be in the phaseout income range, it might be easier to just wait until you exact modified AGI is known and contribute next spring.
In filing for 2009, the income would be reported on line 15 of Form 1040, and the IRS also requires an explanatory statement showing the date and amount of your contribution and corrective distribution.
Permalink Submitted by Al Fry on Fri, 2009-07-03 14:00
Alan – if one is over age 70.5, any excess Roth contribution could not be recharacterized, correct? If the excess was minimal, and one opted to just pay the 6% penalty, can the excess remain in the Roth?
Permalink Submitted by mk foss on Fri, 2009-07-03 18:48
Hi Al:
The 6% penalty applies EVERY year the excess amount is in the Roth. It doesn’t seem worth the hassle with annual penalty forms.
Permalink Submitted by Al Fry on Fri, 2009-07-03 19:35
TKU, Mary Kay. I guess we’ll get it out and file an ammended return.
Permalink Submitted by Alan Spross on Sat, 2009-07-04 03:15
Al,
The excess could remain in the Roth and would be applied to the following year on Form 5329 if taxpayer qualified for a regular Roth contribution and left room to apply the prior year excess in the following year. The 6% would then stop with the first year, but the 5329 would be needed for both years. You are correct that the contribution could not be recharacterized as a TIRA contribution if the taxpayer reached 70.5 in the year of the contribution.