Removing contribution from Roth IRA due to lack of eligibility: when a

[Guest Alexander]

I contributed $4000 to Roth IRA for 1998 and 1999 around March of this year. It looks like I am likely to hit the $150,000 barrier for contribution eligibility by the end of 1999 (I am married filing jointly). Is it true that the best way to deal with the situation is to roll 1999 Roth IRA contribution over into 1999 IRA contribution? Is it true that I have to remove the proceeds from this contribution too? If yes, how do I compute the accrued interest/capital gains on the $2000 1999 contribution and separate them out from the interest and proceeds on the $2000 contribution for 1998? (The task may be nontrivial, since I already bought and sold quite a few shares on the account. What is the penalty for the rollover?

Any insight will be greatfully appreciated.

Alex

[John G]

Advice: (1) talk to your accountant to see if you are really over the hump before you do anything as the hassle factor is big, if you own a business you may want to do a little auto/tech buying this year, you may be able to postpone bonuses to next year, etc (2) talk to your custodian about how THEY would do it. Then go talk with your accountant again.

[Guest Fishchick]

You can "recharacterize" your contribution to a 1999 Traditional IRA contribution if you do so before your tax-filing deadline (including extensions) for 1999. The custodian should be able to calculate the earnings for you. It shouldn't cost you any penalties or taxes on the earnings since they are then treated just like they were earned in the Traditional IRA in the first place.

You might not qualify for a deduction for the IRA contribution, depending on if you and/or your spouse participate in employer sponsored plan(s). Your accountant can help you determine if you'll get to deduct the IRA contribution. Even if you can't deduct the contribution, however, it's still a good idea to make Traditional IRA contributions since you can get tax-deferred growth. At a later time you may qualify to convert the IRA account to a Roth IRA if the eligibility expands or your income changes. You'll lose that potential if you just pull out the contribution and don't recharacterize it to the Traditional IRA.