Roth IRA Contribution Mishap

[rjpatt]

So my accountant aka dad called me tonight after he finished doing my taxes on the computer. My 2006 earned income was $3335. Not a problem except for the fact that I opened a Roth in Jan and contributed 4k to it. The account is at Vanguard.

Does anyone have experience with this type of situation? My first thought was to call Vanguard tomorrow and see if they can change $695 from a 2006 contribution to a 2007 contribution since the account was opened in 2007. Does this plan sound feasible? Any other suggestions?

[Texas Proud]

Yes you can fix it.... I don't know the rules, but I would think you would have to remove it from the account along with the income... but I am sure someone who REALLY knows will chime in..

Since it was a ROTH, no harm done as it was not deducted from your return anyhow...

[Martha]

You need to fix it before April 15. Vanguard has forms for you to fill out to undo the excess contribution, give them a call.

[Nords]

Originally Posted by Martha

You need to fix it before April 15. Vanguard has forms for you to fill out to undo the excess contribution, give them a call.

Yup. I just made the same mistake for 2007 contributions (got a little overenthused) and couldn't cajole Fidelity into deleting the electrons.

You'll get a 2006 1099-R reflecting the return of the excess contribution (no penalty) but the interest/gains (if any) that's returned to you as part of the process may boost your taxable income a bit.

Plenty of time to fix it if Vanguard doesn't fumble the customer service, but it's also not too early to think about a filing extension. And boy, are you going to owe your accountant big-time for this save!

My lesson from this is that I'm going to hold off spouse's future Roth contributions until the income has actually been banked. OTOH we're opening our kid's Roth IRA this week and will probably contribute ahead a bit (2006 and 2007) to make T. Rowe Price's minimums.

[rjpatt]

Just got off the phone with Vanguard. I kept the $695 in the account but it goes against my 2007 contribution. The earnings on the $695 are subject to a 10% penalty. So its gonna cost me a grand total of $2-3. I guess that is my "stupid tax."

[Nords]

Originally Posted by rjpatt

Just got off the phone with Vanguard. I kept the $695 in the account but it goes against my 2007 contribution. The earnings on the $695 are subject to a 10% penalty. So its gonna cost me a grand total of $2-3. I guess that is my "stupid tax."

Well, I guess that's one of your options, but I thought the earnings on the $695 were part of the contribution reversal. I didn't realize there'd be a penalty for it...

[JohnEyles]

Originally Posted by Nords

Well, I guess that's one of your options, but I thought the earnings on the $695 were part of the contribution reversal. I didn't realize there'd be a penalty for it...

I guess it's not being "reversed", just deferred. Since the $695 went in before 2007
contributions are allowed (if I understand correctly), the earnings on them are in some
sense illegitimate - since they occurred on monies that went in too early. In the
extreme, imagine giving them $20K and saying, oh yes, sorry, that was for 2007, 2008,
2009, etc. Then you'd be way ahead because those $5K chunks are earning tax-free
income all that time.

[rjpatt]

Since the $695 went in before 2007
contributions are allowed

Actually thats the part that I didn't understand. The 4k was invested on 1/4/07 so it was after 2007 contributions were allowed, but the lady at Vanguard said I still had to pay a penalty due to it being labeled an 06 contribution. I'll just pay the $3 and not do it again.

[KM]

Originally Posted by rjpatt

I guess that is my "stupid tax."

LOL....most of us have paid that tax in one way or another.

[SecondCor521]

Originally Posted by KM

LOL....most of us have paid that tax in one way or another.

I'm in a higher stupid tax bracket. I think my stupid marginal rate is about 55%.

2Cor521