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.

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Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.