Income levels exceed roth limits, now what?
Throughout 2009 contributions to a roth IRA were made monthly. Income levels were below current limits for contributions, but there was an unexpected signing bonus for a new employer that pushed AGI above $195K during 2009. What do I do with the contributions ($5400 over 50) that were deposited in the ROTH? What are the penalties? Why doesn’t the tax advisor know the answer?
Permalink Submitted by Alan Spross on Thu, 2010-02-11 19:17
If your income will fall under the threshold for 2010 and you have good earnings on the 5400 contribution, you could just pay the 6% excise tax on the 5400 and have the contribution applied to 2010. That will protect the earnings from being taxed and penalized in a corrective distribution.
Or you could recharacterize the contribution to a TIRA contribution which would be non deductible. File an 8606 with your 2009 return reporting a non deductible TIRA contribution. You will then have the funds in a TIRA which can be converted to a Roth anytime you wish. The taxable amount of the conversion is based on pro rating the 5400 against the total value of all your TIRA accounts.
But if you want maximum simplicity you could just request a return of contributions and would get a check for the 5400 plus any allocated earnings or less any losses. Earnings would be taxable and subject to 10% penalty, but not the contribution.
It is very likely that the investment results will determine which is the best of those options, and whether you already have a pre tax TIRA account or not. Please advise more detail if you want more specific advice on how to proceed with any of the above choices.
Tax advisor may be fine on certain issues, but IRAs issues are not included among them………..