Undoing a Roth IRA

If you discover that you earned too much to qualify for a Roth, you can switch to a traditional IRA.

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.

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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.

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.