Roth IRA excess contribution

[daveftc]

Hi - In 2005, I contributed $4000 to my 2005 roth IRA. I now see that my modified AGI is too high and I can not contribute the full $4000. My options are to recharacterize to a regular IRA or to withdraw the extra contribution and its related earnings.

I have now figured that the actual extra contribution is only $500. My IRA provider will not let me open a regular IRA that small, so I must withdraw. I would rather not deal with one tiny $500 IRA account for 20 years anyhow.

So I need to withdraw the excess contribution and the related earnings.

Form 8606 tells me that if I withdraw before the tax filing deadline, I avoid the extra 6% penalty, but:

"you must report the distribution and any related earnings on your 2005 Form 1040, lines 15a and 15b"

The "realted earnings" are taxable for 2005. This increases my 2005 AGI which reduces the amount I can contribute to the 2005 Roth which increases the amount I need to withdraw. Then there are more earnings I need to withdraw which increases my AGI....

How do I break out of this loop? How do I calculate how much to withdraw?

thanks,
dave

 

[Snipes5]

I think you are confused. The income limits for TRADITIONAL IRA are much lower than for a ROTH.

Don't you mean you can't contribute to the TRADITIONAL IRA?

It isn't a distribution if you take it out before April 15th. It's just a withdrawal of excess contributions from the same year.

Take it out, and all it does is get subtracted from your contributions.

And have your taxes done by a professional. This stuff sounds like it is over your head.

Snipes

 

[daveftc]

Don't you mean you can't contribute to the TRADITIONAL IRA?

No - I put contributed $4000 to my 2005 ROTH IRA. I am single and my modified 2005 AGI turned out to be 96,000, so I am only allowed to contribute ~3700 to my 2005 Roth.

I can not take a deduction on a traditional IRA, but I can convert the excess Roth contribution to a nondeductable traditional IRA. (but I can not open such a small one with my broker)

The instructions for form 8606 have a clear example and state that the related earnings on the excess contribution are taxable in the year I made the contribution (2005).

So these earnings affect my AGI which affects how big my excess contribution is.

Or it all may be over my head....

dave

 

[jgombos]

daveftc,

What did you find out?

I could potentially end up in the same situation as you this year. I have not yet contributed to a ROTH IRA for 2007, because there is a chance that I will end up over the 95k line, or whatever the limit is. Were you forced to make adjustments? If so, I may choose to wait until Jan. 2008 to make my 2007 Roth contribution, so I don't have the hassle of filing adjustments and making changes. I'm tempted to contribute now to get the interest going, but I'm thinking it's not worth the hassle of making changes.

Or is the Roth eligibility determined from the AGI of the *previous* year? That would make more sense since the previous year is a known value at the time of the Roth contribution.

 

[abezon]

Gee, Yogi, 6% of $300 is $18. Why not just leave the money in the account & reduce your 2007 Roth IRA contribution by $300?