Ineligible Transfer of Trad. IRA to Roth IRA

[Guest Joycie1209]

In June, 2005 I transferred funds (approx. $2500) from a Traditional IRA with one broker to a Roth IRA with another broker. I now find that our AGI (married filing jointly) made us ineligible to do this (over 100k). In August, 2005, I also contributed another $1000 but put it into a different fund but still a Roth IRA with the same broker. Our AGI for 2005 was between the $150,000 and $160,000 limit. My questions are this: 1. How do I transfer back to a Trad. IR the $2500 + earnings that was ineligible for a ROTH IRA and 2. Would the $1,000 + earings I contributed to a different fund in a Roth IRA still be legal or do I need to also withdraw this amount? We have already filed our 2005 taxes.

[ERISAnut]

The Publication 590 should clear most of this up. There are two separte transactions for which one of them may be okay. We know the Roth Conversion is an issue since your Modified AGI exceeded $100,000.

The actual contribution of $1000 may not be an issue depending on where your income fell between $150,000 and $160,000.

The fact that you had a failed conversion that was not corrected by the tax filing deadline for 2005 was serve to treat the entire $2,500 as a contribution to the Roth. Depending on where your compensation is between $150K and $160K, you may have an excess. We know automatically that the 10% excise penalty on early distributions will apply to the $2,500 as this will be treated as a distribution and not a conversion (since the failed conversion was not corrected). Also, an additional 6% penalty will apply to all amounts consider excess of your Roth Contribution Limit for each year this excess isn't corrected.

Sounds like an amended tax return is coming. You should note that THE DEADLINE FOR CORRECTING A FAILED CONVERSATION IS THE EXTENDED TAX FILING DEADLINE. You may be in good shape if your tax return is on extension. But based on your question, this doesn't appear to be the case.