I messed up !
I retired early this year. My wife is still working, so we were eligible to make Roth IRA contributions for both of us, which I did back in January.
Then I got lucky in the market. With my pension, dividends and short term capital gains, plus my wife’s salary, we are over the MAGI limit for married filing jointly ($160k for 2007 ?)
It is not likely that I will have enough losses before the end of the year to get back under the limit (well, I hope the market doesn’t go down that much 🙄 ).
What do I have to do to make myself “legal” and when do I have to do it by (end of year or prior to filing) ?
Would filing seperately keep my wife’s deposit “legal” ?
Permalink Submitted by Alan Spross on Fri, 2007-11-09 20:19
The income phaseout range for Roth contribution in 2007 is between 156,000 and 166,000. Filing separately is not a solution because the income limit then drops all the way down to 0-10,000 unless you lived apart all year.
Therefore, unless you made HUGE gains in the Roth itself (eg over 40%), you will need to correct the excess contribution. The deadline for doing that is not until 10/15/08 if you file 2007 on time or file an extension. If you don’t have those huge gains in the Roth total account, you have two choices for the correction:
1) Simply tell the IRA custodians that your contributions are excess of the limit and need to be withdrawn. The custodian should calculate the earnings allocated to those contributions back to January and will also distribute them. The earnings will be taxable and also subject to the 10% penalty unless you are respectively over 59.5 on the date of withdrawal.
or
2) Have the custodian recharacterize the contributions to a traditional IRA which will probably not be deductible unless NEITHER of you is a retirement plan participant at any time in 2007. Although you cannot deduct the contribution, the earnings would stay in the traditional IRA account. You would file Form 8606 to report non deductible contributions. There would be nothing taxable for 2007, but you would attach a statement to your return that you recharacterized the Roth contribution to a TIRA contribution. The deadline date is the same as above. Make sure the custodian is clearly told what you are doing so their forms will be correct. These allocated non deductible contributions would not be taxed when you distribute them OR convert to a Roth IRA. The income limits for conversions disappear after 2009.
Now, if you DO have those big gains, post back because there is another option that includes paying the 6% excise tax on the contributions to protect those tax free gains.