My son got married in 2012 and contributed to a Roth IRA. But when he and his wife were doing their taxes, they discovered that their joint income was over the Roth income limit. Is there anything he can do to avoid paying a penalty?
Yes. You usually have to pay a 6% penalty on contributions to a Roth IRA that you make when your income is too high to qualify. But you can avoid the penalty if you withdraw your 2012 contributions (and any earnings on those contributions) by April 15, 2013. That deadline stretches to October 15, 2013 if you file an extension, which can be a good idea if you're making changes at this late date. The withdrawal of contributions is tax-free, but you must include the earnings on the contributions as income for the year you made the contributions.
Or you could avoid both the penalty and the current taxes if you instead have your IRA administrator switch your 2012 Roth IRA contributions -- plus all the earnings on that money -- into a traditional IRA by October 15, 2013. If you 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 2012 contribution.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
Most IRA administrators make it easy to "recharacterize" an IRA, which is the official term for switching from one type of IRA to another (you may need to open a new traditional IRA with the administrator if you don’t have one already). You’ll only need to recharacterize the 2012 contribution and its earnings; you can keep any money you’ve contributed to the Roth in previous years in the account.
If you’re switching the Roth to a nondeductible IRA, you’ll need to file Form 8606 to the IRS reporting the nondeductible IRA contributions. For more information, see the Instructions for Form 8606 and IRS Publication 590 Individual Retirement Arrangements. Also see The IRS Cracks Down on IRA Mistakes.
-
Stocks Slip to Start Fed Week: Stock Market TodayWhile a rate cut is widely expected this week, uncertainty is building around the Fed's future plans for monetary policy.
-
December Fed Meeting: Live Updates and CommentaryThe December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
This Is Why Investors Shouldn't Romanticize BitcoinInvestors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
New 2026 Tax Change Could Mean More for Your IRA and 401(k) SavingsRetirement Savings Here's how the new IRS inflation adjustments will increase the contribution limits for your 401(k) and IRA in the new year.
-
10 Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
-
Claiming the Standard Deduction? Here Are Five Tax Breaks for Retirement in 2025Tax Tips If you’re retired and filing taxes, these five tax credits and deductions could provide thousands in relief (if you qualify).
-
IRS Names Its First CEO: But He’s Also Still Running Social SecurityTax News Will this new role make it difficult to address emerging issues like budget and staffing cuts and customer service concerns?
-
IRS Phasing Out Paper Checks: What Happens After September 30?Tax Changes Avoid delays when IRS tax refunds and Social Security paper checks are cut off. Here’s what to know.
-
Ask the Editor, September 12: Tax Questions on 529 Plan Rollovers to a Roth IRAAsk the Editor In this week's Ask the Editor Q&A, we answer four questions from readers on transferring 529 plan money to a Roth IRA.
-
Ask the Editor, August 29: Tax Questions on Estate and Gift TaxesAsk the Editor In this week's Ask the Editor Q&A, we answer questions from readers on estate and gift taxes.
-
Will You Get a ‘Surprise’ Tax Bill on Your Social Security Benefits in Retirement?Retirement Taxes Social Security benefit payments might land you in hot water when filing 2025 taxes — here are three reasons why.
