Roth excess contributions - withdraw or recharacterize?

[Guest alb]

Contributed $3000 to a Roth IRA in 2004. Through a automatic investment plan, also contributed $1000 to a traditional IRA. My TurboTax s/w is telling me I must adjust my Roth IRA by either withdrawing $1000 and any earnings attributed to it, or recharacterize $1000 of the Roth IRA as a tradional IRA. Can I recharacterize it? Is $3000 the total amount I can invest in either of these IRA's? If I recaharacterize, the total amount I've invested is still $4000. A bit confused by this.

TIA

Al

[BPickerCPA]

You must withdraw it. You cannot contribute more than the combined $3,000, assuming you're under age 50.

[John G]

Barry, I would assume that you could either withdraw $1k from the Roth, or completely withdraw the contributory IRA which was $1k... with the custodian including any of the earnings on the excess contribution. Is there a priority ordering for withdrawal, or can this taxpayer elect?

Also, if any of these funds were actually added after Jan 1 of this year, I would assume that they could be reclassified as 2005 contributions.

Unless the person is over age 50, the maximum contribution for 2004 is $3,000. In 2005, this max moves to $4,000.... but that does not apply to this question.

[jevd]

JOHN G

Treas Reg 1.408A-3 Q & A # 3 Example 2 appears to imply an ordering rule exists. This was pointed out to me by one of my co-workers.

However, when all is said and done, it seems to me that before tax filing date + extensions, it wouldn't matter how it was corrected.

Any thoughts?

JEVD

Q-3. What is the maximum aggregate amount of regular contributions an individual is eligible to contribute to a Roth IRA for a taxable year?

A-3. (a) The maximum aggregate amount that an individual is eligible to contribute to all his or her Roth IRAs as a regular contribution for a taxable year is the same as the maximum for traditional IRAs: $2,000 or, if less, that individual's compensation for the year.

(b) For Roth IRAs, the maximum amount described in paragraph (a) of this A-3 is phased out between certain levels of modified AGI. For an individual who is not married, the dollar amount is phased out ratably between modified AGI of $95,000 and $110,000; for a married individual filing a joint return, between modified AGI of $150,000 and $160,000; and for a married individual filing separately, between modified AGI of $0 and $10,000. For this purpose, a married individual who has lived apart from his or her spouse for the entire taxable year and who files separately is treated as not married. Under section 408A©(3)(A), in applying the phase-out, the maximum amount is rounded up to the next higher multiple of $10 and is not reduced below $200 until completely phased out.

© If an individual makes regular contributions to both traditional IRAs and Roth IRAs for a taxable year, the maximum limit for the Roth IRA is the lesser of --

(1) The amount described in paragraph (a) of this A-3 reduced by the amount contributed to traditional IRAs for the taxable year; and

(2) The amount described in paragraph (b) of this A-3. Employer contributions, including elective deferrals, made under a SEP or SIMPLE IRA Plan on behalf of an individual (including a self-employed individual) do not reduce the amount of the individual's maximum regular contribution.

(d) The rules in this A-3 are illustrated by the following examples:

Example 1. In 1998, unmarried, calendar-year taxpayer B, age 60, has modified AGI of $40,000 and compensation of $5,000. For 1998, B can contribute a maximum of $2,000 to a traditional IRA, a Roth IRA or a combination of traditional and Roth IRAs.

Example 2. The facts are the same as in Example 1. However, assume that B violates the maximum regular contribution limit by contributing $2,000 to a traditional IRA and $2,000 to a Roth IRA for 1998. The $2,000 to B's Roth IRA would be an excess contribution to B's Roth IRA for 1998 because an individual's contributions are applied first to a traditional IRA, then to a Roth IRA.

Example 3. The facts are the same as in Example 1, except that B's compensation is $900. The maximum amount B can contribute to either a traditional IRA or a Roth (or a combination of the two) for 1998 is $900.

Example 4. In 1998, unmarried, calendar-year taxpayer C, age 60, has modified AGI of $100,000 and compensation of $5,000. For 1998, C contributes $800 to a traditional IRA and $1,200 to a Roth IRA. Because C's $1,200 Roth IRA contribution does not exceed the phased-out maximum Roth IRA contribution of $1,340 and because C's total IRA contributions do not exceed $2,000, C's Roth IRA contribution does not exceed the maximum permissible contribution.

[John G]

Example #2 is instructive and on point. But, I think from a practical basis, this person can make either change as long as the total drops below $3,000 and the associated earnings are removed. Ideally, this would be done before April 15/tax filing.

[Guest alb]

Thanks to everyone. I just couldn't find anywhere in the IRS publication when it says the total; amount for both combined is $3000. I now know what I have to do.

Thanks again,