Late Recharacterization from Roth IRA to Regular IRA

[Guest memarama76]

For the fiscal year 2004 I contributed $3000 to my roth IRA. When filing with my husband (we just got married), he informed me that I was no longer eligible to contribute to my Roth IRA and had to convert to a regular IRA. He filed our taxes as if I was contributing $3000 to the regular IRA. I was reading that the deadline to recharacterize was April 15, 2005 unless I had an extension, which would have made the date October 15, 2005. Of course, all these dates have passed, so a representative at my investment firm told me that I had to do a return of excess contributions and pull this money out of my Roth IRA, pay excise taxes of 6% and then file a form 5329. Is this the correct procedure, if yes, should I still see a tax specialist or just do this. I know there is a special calculation to figure out how much to pull out of the funds.

Thanks in advance for any adivce

[John G]

Whoaa Nellie!

If you made the Roth contribution for 2004 (even in early 2005) but then got married in 2005? Then you don't have a problem. Each year is treated separately. The qualifications for you in 2004 are not related to changes in 2005. A legally created Roth with legal contributions is not effected by subsequent changes in your marital status, filing status or income. Once a Roth is established, it continues, even if your subsequent qualifications to contribute change.

So, tell me you got married in 2005! If this is not true, post again with the exact dates of the various events.

PS: Remember to update you beneficiary designations on IRAs, Roths, insurance policies, etc. now that you are married.

[Guest memarama76]

My contribution for the Roth IRA was made in February of 2004, for the tax year of 2004. I married in July of 2004. My husband actually paid a 5329 penalty of 6% when he filed our taxes for 2004, so I think I just need to take the money out of the Roth IRA. But, would I need to pay an additional penalty for any profits made? Also, what is the exact calculation to be used to extract the correct amount of funds?

Hope this makes things more clear.

Thanks.

[Appleby]

All you need to take out at this point is the contribution…no additional penalties will be owed if you remove the amount by 12/31/2005. The formula to which you refer is used only for excess amounts removed by the deadline- which would have been October 15, 2005…assuming you filed your return or filed for an extension by April 15, 2005.

The earnings accrued on the contribution will be treated as a regular Roth IRA distribution, when removed from your Roth IRA. See the thread at http://benefitslink.com/boards/index.php?showtopic=19477&hl for information on how the earnings may be taxed

[John G]

Both in 2004. Yep, that causes a problem. It is your marital status on the last day of the year that matters.

Call your IRA custodian and ask for the BACK OFFICE for IRA/Roths. They know how to handle this problem. You probably need to fax them a letter to get it all done the end of this year. Follow up and make sure they get it done. While the IRS might accept your dated letter, it is the actual transaction date that is supposed to be binding.