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Stupid Roth mistake
Old 01-18-2013, 10:26 AM   #1
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Stupid Roth mistake

So I recently made our annual Roth contributions for 2013. As in years past, I did so with belief that both DW and I could contribute based on her earned income (I'm ER'd 6 yrs now, with no EI). Also, did the max as in years past.

Problem: she's retiring at the end of next month, and her EI for TY2013 will be a lot less than our combined Roth contributions, and I believe the excess is penalized at 6%.

However, I find this in IRS Pub. 590:

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applie?s if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

So if we withdraw the excess now do we avoid the penalty?

Edit: DW is 56. Will the w'drawal of the excess from her Roth be regarded as a "qualified distribution"?
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Old 01-18-2013, 10:57 AM   #2
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Quote:
Originally Posted by BOBOT View Post
So I recently made our annual Roth contributions for 2013. As in years past, I did so with belief that both DW and I could contribute based on her earned income (I'm ER'd 6 yrs now, with no EI). Also, did the max as in years past.

Problem: she's retiring at the end of next month, and her EI for TY2013 will be a lot less than our combined Roth contributions, and I believe the excess is penalized at 6%.

However, I find this in IRS Pub. 590:

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applie?s if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

So if we withdraw the excess now do we avoid the penalty?

Edit: DW is 56. Will the w'drawal of the excess from her Roth be regarded as a "qualified distribution"?
The max contribution for the 2 of would have been $12,000. Can one or the other of you keep going to clear that amount? It can't be much extra time.

Your idea will likely work too, but it would be nice to have that extra money in the Roth.

Ha
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Old 01-18-2013, 11:05 AM   #3
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This is one reason I prepare my taxes and then make my IRA contributions. My income is also very volatile, and I flirt with many of the varying income contribution limits year to year.

But, the good news is you can "un-do" your contribution. For now though, I would wait until DW retires and you know for sure what her earned income will be. You'll have to pay tax and penalty (if applicable) on any earnings.

Excess Contributions to Roth IRAs

Quote:
Withdrawing excess by due date of return. If you find that your contribution to a Roth IRA was improper or too large, you can avoid the 6% penalty tax by taking the money out. Relief from the penalty is available only if the following are true:
  • You receive a distribution from the IRA on or before the due date (including extensions) for filing your return for the year of the contribution.
  • The distribution includes the amount of the excess contribution and the amount of net income attributable to the excess.
When you choose this method of correction, you're required to report and pay tax on the net income attributable to the excess in the year of the contribution, even if you take it out during the following year, before the return due date. The earnings will be taxed like any other taxable distribution of earnings from a Roth IRA, and will be subject to the early distribution penalty if you're under 59 unless an exception applies.
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Old 01-18-2013, 11:05 AM   #4
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Not sure, but I wonder if doing some additional tradional IRA conversion to Roth will raise your MAGI enough to make your Roth contributions kosher? Call the IRS repeatedly and take the answer that you get three times. (Or ask a tax pro).
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Old 01-18-2013, 11:08 AM   #5
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Only earned income is relevant.

Ha
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Old 01-18-2013, 11:32 AM   #6
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The max contribution for the 2 of would have been $12,000. Can one or the other of you keep going to clear that amount? It can't be much extra time.

Your idea will likely work too, but it would be nice to have that extra money in the Roth.

Ha
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Old 01-18-2013, 11:33 AM   #7
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If it turns out that you need to withdraw the excess, I know that Vanguard (at least) is very good about that if your money is there. Just call them up and explain. Once they understand they will withdraw the excess, compute what the earnings on that excess were and withdraw that too, and put it all in taxable for you, and take care of the paperwork for the IRS. I had to do that one year when I unexpectedly didn't qualify to contribute to my Roth. Pretty scary but it turned out to be easy to fix.
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Old 01-18-2013, 01:11 PM   #8
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If it turns out that you need to withdraw the excess, I know that Vanguard (at least) is very good about that if your money is there. Just call them up and explain. Once they understand they will withdraw the excess, compute what the earnings on that excess were and withdraw that too, and put it all in taxable for you, and take care of the paperwork for the IRS. I had to do that one year when I unexpectedly didn't qualify to contribute to my Roth. Pretty scary but it turned out to be easy to fix.
Thanks. We are at VG. When I figure out what the "legal" amount is I'll contact them.
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Old 01-18-2013, 01:16 PM   #9
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Thanks. We are at VG. When I figure out what the "legal" amount is I'll contact them.
You're welcome! For me this happened in 2008, so my memories are a bit fuzzy. I do remember that I had to wait on the phone until one of their retirement account specialists could talk to me, but he acted like this was pretty routine. It seems to me that maybe they e-mailed me a form that I had to sign and send back but it wasn't difficult to do. Anyway, they were very nice and professional and I never had to deal with any IRS complications.
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Old 01-18-2013, 02:34 PM   #10
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You may find you have a few extra bucks eligible if there is a payout of vacation or sick time.
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Old 01-18-2013, 04:17 PM   #11
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From what I was reading about Roth conversion recharacterization, which seemed to generally apply to excess Roth contribution corrections, the earnings calculation was a specific IRS formula that had little relation to reality. So make sure to use the official formula.
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Old 01-18-2013, 04:29 PM   #12
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I always overcontribute funding to my Roth conversion, and recharacterize the excess once I've done my taxes. Since the deadline for the conversion is the end of the calendar year, and the deadline to recharacterize is your tax filing deadline (which can be the following October if you file for an extension) this seems like the only way to maximize your Roth conversion.
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Old 01-18-2013, 05:09 PM   #13
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Get the money out as soon as possible since one has to get the earnings out as well. Her earnings will be unquaiflied and subject to the 10% early withdrawal penalty in addition to the tax.

If you all had enough compensation and had an excess contribution due to your income being too high, then you all could've recharacterized.

And another situation is to pay the excise tax of 6% on the overcontribution and leave the money in knowing that NEXT year, it would not be an overcontribution. Folks who overcontributed early in 2012 and made 25% on their money might want to do this since the earnings can stay in the Roth IRA as opposed to being re-characterized to a traditional IRA (my 2nd paragraph) or withdrawn (my 1st paragraph).
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Old 01-18-2013, 05:15 PM   #14
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If it turns out that you need to withdraw the excess, I know that Vanguard (at least) is very good about that if your money is there. Just call them up and explain. Once they understand they will withdraw the excess, compute what the earnings on that excess were and withdraw that too, and put it all in taxable for you, and take care of the paperwork for the IRS. I had to do that one year when I unexpectedly didn't qualify to contribute to my Roth. Pretty scary but it turned out to be easy to fix.
This happened to me in 2010 and VG took care of all the paperwork. I had made a small gain and paid tax on that when I did our returns that year but it was all very easy.
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Old 01-18-2013, 06:35 PM   #15
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As far as I know, you have until 2013 tax deadline (i.e. April 15, 2014 or Oct 15, 2014 with extensions) to make amends. Fairly straight-forward and the brokerages are used to it. No tax or penalty implications that I am aware of, as long as contributions and earnings are pulled out and earnings are reported as taxable.
You can contact VG now to clarify and again contact them when you are ready with the exact amount.
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Old 01-18-2013, 06:42 PM   #16
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What might help is to have her stop any 401k contributions if she is still contributing since contributions reduce EI. The downside of that is that if her employer offers a match you would be forgoing free money.

I've had this happen in the past and it is no problem. Your Roth IRA provider can help you withdraw any excess (including any growth on the "principal" withdrawn).
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Old 01-19-2013, 06:28 PM   #17
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You're welcome! For me this happened in 2008, so my memories are a bit fuzzy. I do remember that I had to wait on the phone until one of their retirement account specialists could talk to me, but he acted like this was pretty routine. It seems to me that maybe they e-mailed me a form that I had to sign and send back but it wasn't difficult to do. Anyway, they were very nice and professional and I never had to deal with any IRS complications.
Talked to the VG rep yesterday, everything you've said is right on. She answered on the first ring, and after explaining the details of how to handle it she gave me her direct number to call back with the numbers after DW retires.


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You may find you have a few extra bucks eligible if there is a payout of vacation or sick time.
Also right on. In fact, it might be enough to make the problem go away!

I'm feeling much relieved; thanks to all.
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Old 01-19-2013, 08:25 PM   #18
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Talked to the VG rep yesterday, everything you've said is right on. She answered on the first ring, and after explaining the details of how to handle it she gave me her direct number to call back with the numbers after DW retires.
Thanks for that. I've heard from some posters that with the low ER at Vanguard, you give up customer service. Well, I don't think I ever had much need for service there, so I'm not sure. It's good to hear your issue was handled well.

-ERD50
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Old 02-16-2013, 10:31 PM   #19
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I'm in the excess contribution boat for 2012 too. And, I just contributed for 2013 in January, so I can't contribute less this year to make up for it. I made more earnings in dividends this year and never thought that I might exceed the limits.

I will give Vanguard a call on Tuesday.

Thanks for all who shared on this thread.
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