Roth IRA Contribution?

[fjammer22]

I set up a Roth IRA in 2008 in which I was able to contribute the maximum allowed of $5000.

This year, I am not sure if I will have an income of $5000 on my W2.

My question is... What happens if I go ahead and contribute $5000 to my Roth IRA for 2009, and then my W2 shows up and I only made $4000? Will I be forced to remove the $1000 or will I get in trouble with taxes or what?

Thanks in advance,

Tommy

 

[W2R]

If you contribute $1,000 more than you are qualified to contribute, you will have to remove the amount that that $1,000 has become.

For example, if you bought $5,000 worth of VTSMX in your Roth IRA with your 2009 Roth IRA contribution, and by the time you discovered it that was worth $10,000, then you would have to remove $2,000 since your money has doubled. Vanguard has been very helpful with this in the past.

 

[fjammer22]

Excellent. Is this something that the IRS will notify you of?

 

[W2R]

Excellent. Is this something that the IRS will notify you of?

I found out after amending my 1040 using TurboTax (TurboTax told me that I was ineligible for a Roth contribution for 2008). So, I called Vanguard in a panic. They e-mailed a form to me and did some hand-holding while I filled it out. I signed it and mailed it back to them. Then they took care of everything for me. They sold the fund in my Roth IRA where I had placed my 2008 contribution, and put the proceeds in money market in my taxable account as I requested. So far the IRS hasn't been visibly involved though I would assume that Vanguard notified them of this action, just as they notify them each year when I make my yearly Roth IRA contribution.

Oh, I forgot to mention - - they will also remove any dividends produced by the excess contribution, and I would assume that I will have to pay taxes on these dividends. In my case the dividends were almost negligible, and they were reinvested in the same fund, so it was pretty straightforward for them to be removed.

 

[Sarah in SC]

I would risk it and go for it. What we see more often is when your income is too high to qualify for the Roth at the end of the year. Very straightforward to fix, though.
You should look at your W-2 in January and if you didn't make enough, you need to contact the brokerage house to get it fixed before April

 

[quietman]

Can't you make your 2009 Roth contribution after you know what your income for the year is (say early in 2010)? Or maybe contribute some now and more before tax deadline when you know the limit you are working with?

And yes, Vanguard was very helpful when I had to recharacterize some contributions after a tax preparation error. They must see this alot.

 

[youbet]

Can't you make your 2009 Roth contribution after you know what your income for the year is (say early in 2010)?

There ya go...... There is no need to make your IRA contribution before your actual income for the year is known. So, if you suspect a close call, wait until the first quarter of the following year to make the contribution when all the numbers are on the table for your review.

 

[Sarah in SC]

Sure there is a reason you should make it now--time value of money and all that!
Do it now! ...says the FA.

 

[W2R]

I do so agree, Sarah! With the market recovery, contributing now could be a very big plus.

Maybe he could contribute $4,000 or so now and contribute the rest later.

 

[youbet]

Sure there is a reason you should make it now--time value of money and all that!
Do it now! ...says the FA.

What commission do you charge for that kind of "advise?"

Actually, you can invest the funds outside of the IRA until you are ready to move them to the IRA.

 

[Sarah in SC]

What commission do you charge for that kind of "advise?"

Actually, you can invest the funds outside of the IRA until you are ready to move them to the IRA.

<snicker> Chumps work for commissions! I work for biscuits and gravy.

And it is advice when you give it, advise when you are doing it.

You can indeed invest them elsewhere, but for many folks that aren't so highly driven and motivated as us, there are some psychological benefits to "locking it up" in the IRA. Heck, even for the likes of us, I see some benefit. But I am not always Spock, especially if there is a sale at Campmor.

 

[youbet]

The way I read OP's post, it seemed like it was likely he wouldn't have $5k in earned income, or he wouldn't have asked. Given the assumption that he'll most likely have to recharacterize some of his contribution and it's already mid-Sept, I'd just wait the 4 months until he knows the answer and fund the Roth then.

You're comfortable funding it now despite the liklihood of having to recharacterize part of the contribution.

You pays yer money, you takes yer chances...........

This year, I am not sure if I will have an income of $5000 on my W2.

Edit: As an FA, if you were assisting the client in these transactions and it turned out that recharacterizing was necessary, would you charge for helping him make that happen?

 

[Sarah in SC]

Um, youbet, gee,it hurts my feelings that you don't know anything about me.
I work in, ahem, wealth consulting. So...no to your question.

I was encouraging the OP from the behavioral finance standpoint, while making a joke about the "FA" title.

But, hey, you have a nice life now.

 

[youbet]

But, hey, you have a nice life now.

Thanks! It's been going OK so far.