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?"
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?"