I made my 2007 contribution to my Roth IRA last July. But I just discovered that my year-end bonus put me over the income limit to contribute to a Roth ($114,000 in 2007 for single filers, like I am). What should I do? Is there any way to avoid the penalty?
Fortunately, there is because you caught the mistake before your 2007 taxes were due. You can avoid the 6% excess contribution penalty by withdrawing your 2007 contribution -- plus all the earnings on that money -- by the due date of your 2007 return plus extensions (which push the deadline back to October 15, 2008).
You still need to report the earnings as a taxable distribution on Form 1040. You'll owe tax on that amount in your top bracket, plus a 10% early-withdrawal penalty if you're younger than 59½.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But there is a way for you to avoid that penalty and the tax bill, too. Contact your IRA administrator and switch your 2007 Roth contribution, plus any earnings on that money, into a traditional IRA before October 15, 2008 (your IRA administrator should be able to help you calculate your earnings on a pro rata basis).
Most IRA administrators have a form that makes it easy to "recharacterize" your IRA (the official term for switching from one type of IRA to another). If you're switching the Roth into a nondeductible IRA, you'll also need to file IRS Form 8606 to report the nondeductible contributions.
You need to recharacterize only your 2007 contributions plus the earnings on that money. You don't have to touch the remainder of your Roth account.
For more information about Roth and traditional IRAs, see Everything You Need to Know About IRAs. Also see IRS Publication 590 Individual Retirement Arrangements.
-
Getting Out of an RMD Penaltyretirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
-
How Your HSA Can Reimburse You for Medicare Premiums PaidMedicare Even if your Medicare premiums are automatically deducted from your Social Security check, you can take tax-free withdrawals from an HSA to reimburse yourself.
-
How to Correct a Mistake on Your RMDs from IRAsretirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
-
Make the Most of the New Military Retirement Plan
retirement The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.
