How do I withdraw excess ROTH contributions

[CABarb]

Hi,

I am hoping someone can help me answer this question. I had been making ROTH contributions automatically through my checking account. Last year my company decided to keep us on and pay us a retention bonus. As a result, my AIG went up and I can't contribute to ROTH. (I did stop the automatic payments after I heard about the bonus but some payments were already made into the account). I'd like to withdraw the money and take a loss for 2008 tax return. What form do I use?

I have checked my investment and see that I have lost more than half of my contribution amount but I want to take the money out. Can I take the loss on this year's taxes if I withdraw before 4/15/09? I can't roll it over to another years contribution as I will get another bonus for this year. Yes, the company decided to stay open another year and pay us the retention bonus again. Good for me except that I need to take action and make sure I can keep most of the money they're giving to me. As it is, I will be paying supplemental taxes through payroll.

Thanks in advance for any advice you can give me.

 

[REWahoo]

I think this might be of help: Roth IRA Reconversion to Reduce Taxes

 

[Nords]

Hi,
As a result, my AIG went up and I can't contribute to ROTH. (I did stop the automatic payments after I heard about the bonus but some payments were already made into the account). I'd like to withdraw the money and take a loss for 2008 tax return. What form do I use?
I have checked my investment and see that I have lost more than half of my contribution amount but I want to take the money out. Can I take the loss on this year's taxes if I withdraw before 4/15/09? I can't roll it over to another years contribution as I will get another bonus for this year.
Thanks in advance for any advice you can give me.

Unfortunately I have some experience in this area, but at least I have a two-part answer.

First, if you make an ineligible contribution to a Roth IRA, the conventional solution is to call the custodian to have it withdrawn from the Roth and transferred to a conventional IRA. The custodian might do it over the phone but will probably have some sort of form to be filled out, signed, and faxed in.

The custodian uses Pub 590, IRS Notice 2000-39, and IRS Final Regulation 1.408-11 to determine the amount of earnings or losses to be attributed to that recharacterization. (Hey, I'm quoting from Fidelity's letter here. I've never looked at the notice or the final regs and most taxpayers shouldn't have to either. But now you know where to search if you're really curious.) The calculation is based on the IRA's total earnings during the time that the ineligible contribution was in the account. So the amount of the recharacterization will be more or less than the contribution, depending on what kind of year the investment has experienced. For 2008, probably less. You'll get a new 2008 1099-R and a 5498 reflecting these transactions, so if you were planning on filing your 2008 tax return next month then you might as well go get an extension now.

If you want to cash out the amount of the contribution then you'll lose even more than you've already lost-- unless you're able to pull off a 72(t) plan of substantially equal periodic payments over a number of years then you'll pay an additional penalty for an ineligible distribution. And to add insult to all these previous injuries, IRA losses are not tax-deductible in the manner of taxable investment losses. So I don't think that you'd be able to deduct the losses on any year's taxes, let alone this year's taxes.

My advice would be to have your custodian put your 2008 and 2009 IRA contributions into a conventional IRA. (Assuming you're eligible to contribute to a conventional IRA.) When your AGI is lower then you can decide whether or not you want to convert your conventional IRA to a Roth. One consideration is the value of the investment but there are other conversion considerations (http://www.early-retirement.org/for...vert-my-ira-401-k-to-a-roth-or-not-30664.html) that make this a complex decision.

I fell into this Roth-eligibility trap by trying to contribute money to a Roth IRA as soon as it had been earned. I've since learned not to make any IRA contribution until January of the following year, when I know exactly where we're eligible to contribute.

 

[73ss454]

Nords, help me out here please. I though one would have to make any roth conversion by Dec 31st. How do you wait till Jan to do this?

 

[REWahoo]

Nords, help me out here please. I though one would have to make any roth conversion by Dec 31st. How do you wait till Jan to do this?

I believe the issue is Nords is referring to a Roth contribution and you are asking about a Roth conversion. Two different animals.

 

[73ss454]

gotcha!

 

[REWahoo]

gotcha!

Translation...

YouTube - Gilda Radner Nevermind

 

[Sarah in SC]

CAB, you may want to ask your IRA custodian for assistance, there is usually a department that can help walk you through the process, at least there is at Schwab.

 

[Nords]

Nords, help me out here please. I though one would have to make any roth conversion by Dec 31st. How do you wait till Jan to do this?

As REWahoo said, when you're moving the money from a Roth back to a conventional IRA, and cursing along the way, then it's a "recharacterization". (Apparently the IRS gets to [-]recharacterize[/-] create their own vocabulary.) But when you move the money from a conventional IRA to a Roth then it's a conversion.

So you can recharacterize a conversion, but you can't reconvert a recharacterization for at least another year. Perfectly clear, right?

Today I've realized that I'm in even worse trouble than I thought. In 2007 I made a 2007 contribution to spouse's Roth IRA. Later that year we started taking cap gains (rebalancing) and our AGI went over the Roth contribution limits. In Jan 2008 I made a 2008 contribution to spouse's Roth IRA and in Feb we took another huge slug of cap gains (more rebalancing). I didn't realize my double mistake until I started our tax returns in Feb 2008, so I recharacterized both (unqualified and excess) contributions at the same time. In Feb 2009 Fidelity sent me a 2008 1099-R that contains both the 2007 and the 2008 recharacterizations.

Can you tell that I've spent four quality hours with TurboTax today, and I'm still trying to get it to understand the difference between the two?

If spouse or I ever make another IRA contribution, I'm doing it in January-April of the subsequent tax year.

 

[CABarb]

Thanks all for your replies. I had forgotten where my post was so I couldn't reply earlier. I will have to recharacterize my ROTH into Traditional since I can't take losses. I hate the tax codes when they mess with you like that. I'm doing my own taxes but I think I may need to go to a CPA this year. Things are getting way to complicated now.

 

[landover]

Additional question about roth conversion

Suppose I converted some amount to ROTH from traditional IRA in tax year 2008, I discovered in March'09 that If I recharacterize X amount back to traditional IRA no taxes are due. I recharacterize X amount back to trad. IRA.

Now my question is that can I continue ROTH conversion for tax year 2009, or do I have to wait for one year from the date I recharacterized? I hope that I put the question right.

Thanks