What to do on an ineligible Roth investment

[Guest lorenzo]

A week ago I transferred $3,000 into a Roth account between mutual funds in the same family. Working out my taxes I realized that this year I did not qualify for the investment because I've spent my time as a student and do not have $3,000 earned income. Now I'd like to remedy the situation with as little trouble (and penalties) as possible. I think the best way to go is to switch it over to stand as a 2004 contribution, but the fund rep said that penalties may still be incurred if there have been any earnings on the account in the last week.

Any thoughts?

[John G]

You indicated that the contribution occured in 2004. If you expect to have $3,000 in earnings in 2004, then your problem may be resolved by reclassifying the "year" you designated for the contribution. Errors on year designation are common (such as failing to put the funds in 2003 when contributions are made in early 2004, double contributions in one year, etc.). My experience is that many custodians just switch the designation. I am not sure if that has any legal issues, but it seems that "technical corrections" happen a lot.

Try calling the custodian again and just ask them to change the designated year to 2004 and see what they say.