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I messed up my Roth!!
Old 11-30-2010, 12:59 PM   #1
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I messed up my Roth!!

Before my question, here is the background.

1. We have never been eligible to contribute to a Roth because of our income being too high. (Nice problem to have).

2. I retired end of January 2010, DW retired end of December 2009, and I had 2 months worth of salary paid this year so we are both eligible to contribute to an IRA.

3. Because of roll-overs from previous employers DW has a lot of IRA money with a total cost basis that is a low % of the total. I have a lot in my 401k but only $55k in a tIRA with a cost basis of $40.5k.

4. My 401k has decent options and low costs so I decided not to roll it until 2011 to allow me to convert my tIRA to a Roth and only pay taxes on ~$15k

5. Early Feb, I converted my tIRA to a Roth and also opened a Roth for DW and contributed $6k. I also contributed $6k to my newly created Roth.

6. In April I got an unexpected large bonus (20%) based on 2009 salary and then in June FIL passes away and the house he was living was sold. DW owned a 25% share of it from 1997 and so the income and capital gain was significant.

7. I did a trial run of my taxes at the weekend and discovered that our income now exceeds the max allowed for a Roth contribution.

So, I have requested a re-characterization of DW's conversion, and also of my contribution (I decided to leave the rest of the conversion as is). I expect that this will result in me having a tIRA contribution >$6k since VG will calculate the new value based on the growth during the 10 months it was in the Roth.

Finally, my question is: "Do I simply withdraw the excess contribution, and will I be subject to any tax penalty for this mess up?"
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Old 11-30-2010, 02:26 PM   #2
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Sorry, I don't have an answer to your question but I enjoyed reading your post and I thought to myself: "he's having wonderful problems to solve and he's definitely rolling in $$"
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Old 11-30-2010, 02:28 PM   #3
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This is a frequently-asked question, so by now, you have already located the answer at Fairmark.com
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Old 11-30-2010, 02:34 PM   #4
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Originally Posted by aida2003 View Post
Sorry, I don't have an answer to your question but I enjoyed reading your post and I thought to myself: "he's having wonderful problems to solve and he's definitely rolling in $$"
Thank you. I realize that it is a nice problem to have. I thought everything was under control until I blew it

As for rolling in $$, well, anything can happen in the next 40 years to change that now that we've "cut the Corporate strings" and are fully retired.
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Old 11-30-2010, 02:35 PM   #5
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Originally Posted by LOL! View Post
This is a frequently-asked question, so by now, you have already located the answer at Fairmark.com
Perfect - thanks
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Old 11-30-2010, 02:45 PM   #6
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and if you can't find the answer yourself, try asking on the forum (retirement subforum) and hopefully you'll get a reply from Alan S.
Fairmark Forum :: Retirement Savings and Benefits
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Old 11-30-2010, 02:45 PM   #7
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I'll bake you one of these:
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Old 11-30-2010, 02:50 PM   #8
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Thanks Kaneoh.

I'll post a question as the IRS link I followed from Fairmark is not clear to me. It says I can apply excess to next year if I have earned income (which I won't).

Quote:
More Than Maximum Contributions




If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. However, a penalty or additional tax may apply. See Excess Contributions , later under What Acts Result in Penalties or Additional Taxes.
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Old 11-30-2010, 02:52 PM   #9
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Helpful as ever
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Old 11-30-2010, 03:03 PM   #10
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I think you are overanalyzing. 2010 you contrib'd $6000 to Roth; also wife did same. (Spousal C I assume). I assume you had earned income of at least $12,000.

You later got income that makes you ineligible for Roth contributions. If you are eligible for TIRA contributions, you should have have no problem, as this is exactly what my situatiuon was. It was resolved with no sweat by simple recharacterizations. (Though this did not involve Vanguard.)

Ask Vanguard about the earnings, they may just transfer to the TIRA, or to a whole new TIRA if you prefer.

Why not ask the people who do it all the time, and who will be called on to do yours?

Ha
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Old 11-30-2010, 03:12 PM   #11
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Quote:
Originally Posted by haha View Post
I think you are overanalyzing. 2010 you contrib'd $6000 to Roth; also wife did same. (Spousal C I assume). I assume you had earned income of at least $12,000.

You later got income that makes you ineligible for Roth contributions. If you are eligible for TIRA contributions, you should have have no problem, as this is exactly what my situatiuon was. It was resolved with no sweat by simple recharacterizations. (Though this did not involve Vanguard.)

Ask Vanguard about the earnings, they may just transfer to the TIRA, or to a whole new TIRA if you prefer.

Why not ask the people who do it all the time, and who will be called on to do yours?

Ha
Thanks Ha,

I will do just that once the re-charcterization is completed. Then I will know how much was re-converted. It has been in a Wellesley fund for about 10 months so I expect it will have earned a few hundred $ that I will have to withdraw (I don't believe I can re-characterize again so soon but that would be my preferred solution).
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Old 11-30-2010, 04:35 PM   #12
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Alan,

After reading ha's post, I re-read your OP and think I agree with Ha that you are overanalyzing (but still suggest running it by Alan S at fairmark). I thought you had recharacterized YOUR TIRA conversion and your Roth but it looks like you recharacterized DW's TIRA conversion only and YOUR Roth.
If that is the case, then whatever you got from YOUR Roth recharacterization is what can go into your TIRA (I think). I believe recharacterization of a contribution just means....oops, this should have been a TIRA, not a Roth , from the very beginning so the recharacterization even if it is more than a normal maximum contribution would be ok. EX: You contribute 5K to Roth. It grows to 10K.
You recharacterize 10K and it is now in a TIRA. That 's exactly what the situation would be if it had been TIRA from start. I assume the fund company is the one who calculates the recharacterized amount and presumably they know what they're doing.
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Old 11-30-2010, 04:49 PM   #13
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Alan,

After reading ha's post, I re-read your OP and think I agree with Ha that you are overanalyzing (but still suggest running it by Alan S at fairmark). I thought you had recharacterized YOUR TIRA conversion and your Roth but it looks like you recharacterized DW's TIRA conversion only and YOUR Roth.
If that is the case, then whatever you got from YOUR Roth recharacterization is what can go into your TIRA (I think). I believe recharacterization of a contribution just means....oops, this should have been a TIRA, not a Roth , from the very beginning so the recharacterization even if it is more than a normal maximum contribution would be ok. EX: You contribute 5K to Roth. It grows to 10K.
You recharacterize 10K and it is now in a TIRA. That 's exactly what the situation would be if it had been TIRA from start. I assume the fund company is the one who calculates the recharacterized amount and presumably they know what they're doing.
I logged onto my VG account and can see they have started to do the recharacterization of my contribution to my Roth. DW's is easy and no problem there, but with me I converted a tIRA to a Roth and then a few weeks contributed to it. I now realized I earned too much and need to extract that contribution and earnings from the Roth into a tIRA.

Just discussing it here makes it all seem much simpler. I'll post again once the transaction is complete and I ask VG for advice but I believe that you are correct that nothing more will need to be done as the earnings will move from the Roth to the tIRA and be tax deferred again, so the IRS is not out of pocket.
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Old 11-30-2010, 06:57 PM   #14
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I guess I'm not as good a reader as I thought........I think your situation will be simple if you have faith that VG will do the recharacterization correctly. I did that w/ Schwab......right or wrong, it was simple. If you want to stick your nose in and check, it might be more complicated. I don't really know how it works but it's kind of like the pro-rata rule (or a mini-version) for when you convert a mix of deductible and non-deductible TIRAs. Some folks advise doing conversions into a separate "seasoning" Roth account until you can no longer recharacterize. That way you get to preserve the characteristics of whatever you've invested in. If, as you apparently did ?, mix a conversion w/ a contribution and invest them in different things in the same account, the recharacterization will also take on a blend of the various things in that account in terms of the numbers which can be either good or bad. For example if your contribution appreciated from 5K to 10K but the rest of the account stayed the same, when you recharacterize the contribution, you will be pulling out less than 10K (I think) which would be good. The opposite could also happen.
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Old 11-30-2010, 09:11 PM   #15
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The recharacterization is complete. A new tIRA now exists, showing a $6k contribution and $474 of gains, and the Roth is less the $6,474.

All's well that ends well.
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Old 11-30-2010, 09:35 PM   #16
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Originally Posted by Alan View Post
I will do just that once the re-charcterization is completed. Then I will know how much was re-converted. It has been in a Wellesley fund for about 10 months so I expect it will have earned a few hundred $ that I will have to withdraw (I don't believe I can re-characterize again so soon but that would be my preferred solution).
TurboTax will also happily and enthusiastically guide you through the process of recharacterizing and carrying forward the excess to next year, along with gory descriptions details of the penalties (if any).

No, I don't want to get into how I learned that.
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Old 11-30-2010, 10:21 PM   #17
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I think you're supposed to file a brief narrative describing the recharacterization dates/amounts/what happened when you file your taxes
next yr.
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Old 12-01-2010, 02:03 PM   #18
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I think you're supposed to file a brief narrative describing the recharacterization dates/amounts/what happened when you file your taxes
next yr.
Thanks. As Nords says, I'll let Turbotax guide me through the forms.
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