Ask Kim


Roth Contribution Redo

Kimberly Lankford

Here's what you can do if you've discovered your income was too high to contribute to a Roth after you already put money in your account.



I put $5,000 in my Roth IRA last April. In September, I got married, and our combined income put us over the limit for contributing to a Roth. What will become of the $5,000 I put in the IRA for 2009?

It doesn’t matter that you were single when you made the contribution. The fact that you were married by yearend means you can’t contribute to a Roth if your combined income on your joint return is over $176,000 -- the cut off for married couples. So, you basically need to make the Roth contribution go away. And, there are a couple of ways to do that.

First, you can simply withdraw the $5,000 and any earnings on it (the IRA sponsor will figure the earnings for you). Any earnings will be taxed as 2009 income and, if you’re under age 59½, hit with the 10% early withdrawal penalty.

The second option is to “recharacterize” the Roth contribution as a nondeductible contribution to a traditional IRA. If you take this approach, you’ll need to file a Form 8606 with your tax return reporting the contribution. Here’s the good news: After you go through some paperwork to switch your contribution from a Roth to a traditional IRA, you can immediately convert the traditional IRA to a Roth.

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Starting this year, the income-eligibility limit for Roth IRA conversions disappears, so anyone can convert to a Roth. If all of your traditional IRAs are funded solely with after-tax contributions, like your 2009 contribution, then you will owe taxes only on the earnings when you convert to a Roth. But if you’ve made both tax-deductible and nondeductible contributions to your traditional IRAs over the years, then the tax-free portion of your conversion will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs.

Got a question? Ask Kim at askkim@kiplinger.com.



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