ROTH/IRA. Contributions

Submitted by Eduardo Arenas on Mon, 2015-02-09 22:35

A married couple make around $245,000 a year. They file join taxes. One spouse opened a Roth//Ira last year with $4,900 and is contributing $300 a month. They do not qualified for a Roth/Ira account due to their income. Please advise what does he has to do with this account? Any tax consequences? Thanks



Submitted by Alan - IRA critic on Mon, 2015-02-09 22:48

  • Taxpayer could request a corrective distribution of the 2014 excess contribution from the IRA custodian, assuming that the contribution for 2014, not 2013. The custodian must calculate the amount of earnings on the contribution and return any earnings along with the 4,900. The earnings will be taxable on their 2014 tax return and subject to a 10% penalty unless the taxpayer has reached 59.5. They also need to stop the Roth contributions. Once the above is completed, if they expect income to be over the limit for 2015 as well, they need to do the same with the 2015 contributions.
  • Another choice is to have the excess contributions recharacterized as traditional IRA contributions which would not be deductible. The only affect on the 2014 return would be that Form 8606 must be filed to report a 2014 non deductible contribution. There is no tax due. If they have no other non Roth IRAs but the recharacterized contribution, they can then convert it to a Roth IRA and pay taxes only on the amount the balance has grown beyond 4,900. If they do have other non Roth IRAs, the conversion would be mostly taxable.

Submitted by Eduardo Arenas on Mon, 2015-02-09 23:18

could you please call me 925-858-9138?  I am confuse with the answer, the $4,900 and the $300 is after tax money..what is the excesscontribution For th IRA? The spouse opened a Roth/Ira with after tax money.  Please advise

Submitted by Jose Morales on Tue, 2015-02-10 00:08

the $4,900 and any $300 contributions made in addition to that are all excess contributions because the MAGI for this couple is above the contribution limits.  As you stated, they do not qualify for a Roth because of these income limits.  If they withdraw the funds as an excess contribution correction, including earnings attributable to the excess, by the tax filing due date they will not be negatively affected.  That is assuming the contributions are for tax year 2014, as Alan explained.  The alternative, again as Alan stated, is to recharacterize the contribution to a Traditional IRA contribution.  The reason this is an option is because there is no limit on MAGI when determining eligibility for a Traditional IRA contribution.  However it is highly likely that they cannot take a tax deduction if they recharacterize because they probably have an employer sponsored retirement plan that they can participate in.  Just because you do not qualify for a tax deduction on a Traditional IRA contribution does not mean that you cannot still make a non-deductible contribution.  Hope that helps.

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