HELP!!!! Roth IRA troubles- College Student freaking out

[needhelp12313]

What is the name of your state? NJ (School in PA, where I work part time job)

Hey guys,

I am currently a college freshman.

In the year 2007 (during my senior year of high school), I received a $2500 national merit scholarship. I also had earned income (from part time job) of about $500.

I chose to get a T. Rowe Price Roth IRA account, and made a contribution of $2500 for the year 2007. At the time, I thought that all types of income were counted towards the maximum contribution eligibility.

I recently found out that only earned income counts for the max contribution eligibility.

This means that I have over-contributed to my Roth IRA by about $2000!!! I opened the T Rowe Price account and made the contribution around september. Since then, I have sold some mutual fund shares and bought different mutual fund shares- without making any withdrawals.

My question is, how would I go about resolving this issue without incurring financial penalties (or minimizing them as much as possible)?

At this point, is it possible to re-designate $2000 of my original contribution (previously marked for 2007) to the 2008 year? (I haven't earned that much yet in 2008, but will by the end of summer- Is it possible to make contributions before actually earning the money, if I know for sure that my income will exceed that amount by the end of the year?)

And if I can get this straightened out, will it be possible to file all the tax forms correctly by the deadline?

Thanks for helping a college student in distress~

[tranquility]

You can withhdraw the overcontribution, including the appreciation on the money, before April 15th. You will pay taxes on the amount above the basis. You can recontribute the amount at that time for 2008.

[FlyingRon]

The rule is not "earned income" but "taxable compensation." If this scholarship was reported on a W-2, you could use it torwards your IRA limits, if not then yes you have a problem.

But it's fixable. Withdraw the excess and any INCOME it has earned.
All you need to do is pay tax on the INCOME it earns (you've already been taxed on the excess itself).

This option is only open if you do it before filing is due (April 15) for the tax year.

[needhelp12313]

Originally Posted by FlyingRon

The rule is not "earned income" but "taxable compensation." If this scholarship was reported on a W-2, you could use it torwards your IRA limits, if not then yes you have a problem.

But it's fixable. Withdraw the excess and any INCOME it has earned.
All you need to do is pay tax on the INCOME it earns (you've already been taxed on the excess itself).

This option is only open if you do it before filing is due (April 15) for the tax year.

I want to emphasize that I haven't filed my taxes yet for this year.

So flying Ron, has the 6% penalty been applied to my account yet? Or do I still need to be taxed on the excess itself?

I actually lost money on the mutual fund shares since the time of purchase.

So how much do you think I'll still pay in penalties?

Thanks,
-Zoe

[LdiJ]

Originally Posted by needhelp12313

I want to emphasize that I haven't filed my taxes yet for this year.

So flying Ron, has the 6% penalty been applied to my account yet? Or do I still need to be taxed on the excess itself?

I actually lost money on the mutual fund shares since the time of purchase.

So how much do you think I'll still pay in penalties?

Thanks,
-Zoe

Withdraw the money before April 15th and you won't have a problem at all.

[FlyingRon]

Yes, with no income from the excess, you've got nothing to worry about. Just take out the excess contribution before tax day. There's no penalty and none should be assessed on the withdrawl.

[needhelp12313]

Originally Posted by LdiJ

Withdraw the money before April 15th and you won't have a problem at all.

Phew, that makes me feel much better.

But do my 1099-R and 1099-DIV forms change at all? Will T-Rowe Price automatically send in my revised forms?

And will I have to change my 1040 form in any way? (It hasn't been sent in yet, but it's been completed under the assumption that nothing was wrong-before I realized I overcontributed)

-Thanks,
Zoe

[LdiJ]

Originally Posted by needhelp12313

Phew, that makes me feel much better.

But do my 1099-R and 1099-DIV forms change at all? Will T-Rowe Price automatically send in my revised forms?

And will I have to change my 1040 form in any way? (It hasn't been sent in yet, but it's been completed under the assumption that nothing was wrong-before I realized I overcontributed)

-Thanks,
Zoe

Please withdraw the money ASAP and then go do your taxes with a professional. You don't understand enough to do this on your own.