Roth IRA over contribution gain/loss reognition
Hello!
Due to some investment sales and my husbands new job, we apparently cannot contribute to a Roth IRA. Unfortunately, I did not realize this until last week. I had already made my 2007 and 2008 contributions over the past 11 months or so and my husband put in his 2007 contribution over 2007 as well.
I am concerned about how the gains and losses will be handled after I withdraw the over contribution this week. After calculating it all out:
I lost $392 out of my $4K in 2007 (removed $3607 net) and lost $94 out of my 5K of 2008 (removed $4905 net) Total loss of $486.
My husband gained $223 from his $4K 2007 contribution (removing $4223).
Based on this, filing jointly using standard deductions, should I not report anything related to ROTH IRA gains or losses, since we have a net loss between the both of our accounts? Do I need to report anything next year when I get statements from my financial institution on this?
Also, how long do I have to track all this in and out activity. I’m still young and won’t retire for at least another 35 years! Any guidance would be greatly appreciated.
Thanks in advance!
Permalink Submitted by Alan Spross on Thu, 2008-03-13 17:40
You cannot deduct a loss on a corrected excess contribution, not unless you completely close all your Roth IRAs, and that generally is not advisable unless you have a huge % loss and very small balance remaining.
Most IRA custodians will calculate the gain or loss when you request a return of contributions. They must follow an IRA approved method to do this, but it won’t hurt for you to have done this just to see if their figure is close. However, any earnings that must come out are taxable and subject to the early withdrawal penalty. You cannot net your IRA loss against your husband’s gain. His gain goes on line 15b of Form 1040, and a 10% penalty on those earnings gets added on line 60. The IRS wants a brief explanatory statement explaining the withdrawal because the 1099R forms will not be issued until next January. At that point you can ignore the 1099R because you will have reported the 2007 correction on your return, but check to see if the 1099R agrees with your figures. Your IRA custodian should issue a statement after the return of contributions showing the earnings figure (or loss) and that should match the 1099R.
For 2008, I assume you are confident this early in the year that you will be over the income limits at year end. The modified AGI phaseout for 2008 has been increased to 159,000 -169,000. In that range a partial contribution is permittted, and no contribution if income is over 169,000.
You would report the 2008 correction on that return next spring in the same manner as you are doing now for 2007. Sounds like you are the only one who contributed for 2008 and there will be a loss, so there will be no income or penalty on your 2008 return. And you will not need an explanation for that since the 1099R for 2008 will be issued.
The only tracking you should need for your Roth IRA is a one page listing showing each year starting with your first Roth contribution. It should show the amount of any regular contributions and also any conversions and distributions. Any correction of excess contributions should be reflected by simply changing the figure to the amount remaining. For example, on your sheet it would initially show for 2007 a contribution of 4,000, but since you have withdrawn that, just x it off and show 0. You do not have to track earnings. Each spouse should have their own sheet for this as the IRAs are individual. The sheet will contain information to allow you to report any actual distriubtions other than corrections many years down the road. All distributions come first from regular contributions, the conversions, and last from earnings. The value of your account in excess of the contributions is obviously the total earnings.
Starting in 2010, you will be able to convert to a Roth since the income limits totally diappear after 2009. You could have recharacterized these contribution to a traditional IRA (non deductible ), and then converted it in 2010 to a Roth, but sounds like you have already ordered the corrective distributions.