JAMES PATRICK

If you look at Pub 590 on pages 53/54 you will see that your modified AGI must be less than $160,000 to contribute to a Roth IRA. To get your "modified" AGI you must add the foreign earned income exclusion, in your case $80,000, which will put you over the maximum $160k, so a Roth would not be allowed.

Yes.

You net all your Schedule C's to determine if you have a profit or a loss. So your profit would be $2000 less 1/2 of your SE tax, and that would be your maximum eligible contribution.

There will be no 10% penalty for early withdrawals. The 1099 will be coded 4 which indicates death of the original holder and that withdrawals are not penalized to the beneficiaries.

Redeposit it in your IRA and don't report on 1040 as it was listed as non-taxable.

Why not just leave the funds in the Roth. If you need them for the children's education there will be no tax or penalty on the contributions you made and only tax, no penalty, on the earnings if used for education. If money not needed for education than it is still in your Roth.

There is a website run by an individual named Joe Hurley which has info on 529 plans in all 50 states. He is mentioned on numerous boards as being very knowledeable and I believe he has written a book. the site is : savingforcollege.com

I guess I am missing something because when I look at Pub 590 p55 it mentions "taxable compensation" and I was under the impression that foreign earned income (2555) was not taxable.

I've had accounts with TD Waterhouse for years and have had dividends reinvested in both my Traditional and Roth accounts, as well as a taxable account. They have handled it without any major problems. Even some EFT's which pay monthly, $2.00 or $2,000.00, didn't make any difference.

Since it appears that herb contributed to an IRA when he had no earned income the excess contribution had to be withdrawn by the due date of the year in which the contribution was made. I am assuming the contribution was over $2000. If you look at page 48 in Pub 590 you will see that ALL the withdrawal should be included as gross income. It has always been my reading of this section that this was the IRS way of letting individuals who tried to "game" the system by overcontributing or by making ineligible conversions that the penalty was going to be more than 6% a year. In classes I have taught on IRA's I have always warned against this and have been suprised others haven't spoken about the penalties. If you think about it there is a logic to this position ( I know, I know -- logic --taxes--???) if the contribution/conversion was ineligible than there is NO basis and withdrawals should therefore be taxable.

If you converted an IRA to a Roth in 2003 the correct code in box 7 is 2. That means there is no 10% penalty. If you have a different code than you did't do a conversion.

Since you paid taxes when you converted, the funds are not taxed when you take a distribution. As the conversion took place over 5 years ago there is also NO 10% penalty, and as you had a loss and therefore did not withdraw any earnings there is no tax or penalty on them. You may have the ability to deduct this loss on Schedule A if it was the only Roth you had and if you itemize. Chances are pretty slim it would be worth your while.

The "I" in IRA is for individual, so you both can contribute $3000 to your own Roth, unless you or spouse are over 50, then it is $3500.

I see it as a valid contribution of $180 and an excess of $2820.

My opinion,just that, is that if you do this as a business or trade and pay S/E taxes than it is OK for IRA purposes. If a one time deal, no S/E tax, no IRA.