Advertisement
retirement

Excess Roth IRA Contributions

You have a couple of options if you discovered you topped the income limit for contributing to a Roth after you already stashed money in your account.

My wife and I both contributed $4,000 to our 2006 Roth IRAs in January 2006. I finished working on my taxes this weekend and discovered that we went over the $160,000 adjusted gross income limit to contribute to a Roth. What can we do to avoid a penalty?

You could avoid the 6% excess contribution penalty by withdrawing the 2006 Roth contributions, and all of the earnings on them, by April 17, 2007. You would report the income earned on it as a taxable distribution from the IRA on line 15 of your 2006 Form 1040 and pay tax on that amount in your top tax bracket. If you're under age 59#189;, you'd also have to pay a 10% early withdrawal penalty on the income distribution.

Advertisement - Article continues below

But you can avoid all of the penalties if you contact your IRA administrator right away and explain that you just discovered your 2006 income was over the limit. You won't be hit with a penalty as long as you have the administrator switch your 2006 Roth IRA contributions -- and the earnings on them -- into a traditional IRA by October 15, 2007. If you'd already made contributions to the Roth in earlier years, the administrator should calculate how much of the earnings in the account should be attributed to the 2006 contribution.

Advertisement
Advertisement - Article continues below

Most IRA administrators have a form making it easy to "recharacterize" the IRA, which is the official term for switching from one type of IRA to another. If you don't already have a traditional IRA account with that administrator, you'll need to open one up.

If you're switching the Roth into a nondeductible IRA, you'll need to file Form 8606 to the IRS reporting the nondeductible IRA contributions. For more information, see the Instructions to Form 8606.

You only need to recharacterize your 2006 contributions (and the earnings on those contributions). You can keep any money you've contributed to the Roth in previous years in your Roth account.

The money you switch to a traditional IRA now doesn't have to stay there forever. Generally, you can convert a traditional IRA to a Roth only in years when your income is below $100,000. But that income limit disappears in 2010, letting anyone make the switch. You just need to pay taxes on the earnings (or on the full amount of any tax-deductible contribution) when you convert the traditional IRA to a Roth, but then you won't owe taxes on it when you withdraw the money from the Roth in retirement.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020

Recommended

Stars Align for Some Special Wealth Planning Opportunities
Roth IRAs

Stars Align for Some Special Wealth Planning Opportunities

A confluence of special tax, interest rate and market circumstances makes this a great time to execute income and wealth planning strategies that can …
June 26, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
12 Ways to Get Your Retirement Plan Back on Track
retirement planning

12 Ways to Get Your Retirement Plan Back on Track

If your financial situation hits a rough spot, there are a number of things you can do to get your retirement plan moving in the right direction again…
June 19, 2020
Why 2020 Is an 'Unprecedented Opportunity' for a Roth IRA Conversion
retirement

Why 2020 Is an 'Unprecedented Opportunity' for a Roth IRA Conversion

Tax advisors say you can reduce your tax bill by 30% to 40% in this unprecedented time.
June 17, 2020