Contributed monthly and AGI got over 156,000

[Guest cfree3]

I had been just told 5 days after the grace period date the if you AGI for the year is over $156,000 for the year that you can't contribute to a Roth IRA. We didn't know that we were going to go over or even come close but we had cut back on 401K investing to have more available income for early retirement. That made our AGI for 2006 go over. We did invest on a montly basis to our Roth IRA. Now I was told that I must remove the amount contributed and estimate the earning and file an amended 1040X for the earnings income. Etc. Etc. How else can this be handled?

Now this year we have been contributing to our Roth IRA's up until Oct. and we have not exceeded the AGI yet so I have maxed out our 401K's for the remainder of the year to try to stay below $156,000. Would you recommend I move our contributions right away now or wait to see if we go over $156,000 this year or not. I have stopped making Roth IRA contribution for now until we know for sure.

Help!!!!!!! Who would know we would make enough money to go over the limit!!!!!!

[masteff]

See page 62 (and pages 48-51) of Pub 590 at www.irs.gov (follow the forms and publications link). Another place to look is the instructions for form 5329 (which is where a penalty on the excess contribution would be reported and also where an excess from a prior year can be applied to a subsequent year). You might call your IRA company and see if they're able to assist you; for example, since it's still the current year, they may be able to move this year's contributions to a non-deductible traditional IRA.

For future years, I'd suggest putting the amount into a savings or other taxable account until you know for certain where you are on the limit and then contribute to a Roth or non-deductible traditional IRA before filing your tax return but after you know your AGI.

[txdd]

First, get IRS Pub 590 and read the section titled "What if you contribute too much?" in the Roth chapter. Pub 590 also has worksheets for figuring your Modified AGI (MAGI) for Roth contribution limits and your maximum Roth contribution.

If you are married filing jointly, the Roth contribution phaseout range for MAGI was $150K-$160K for 2006. This means that you could have made your full Roth contributions if your MAGI had been below the first number and zero if above the second number. In between, the limit declines more or less proportionally. The MAGI range is now adjusted each year for inflation. For 2007, the range is $156K-$166K.

The deadline for penalty free correction of 2006 excess contributions was Oct 15, 2007. You are now probably faced with the penalty of 6% of the excess. To avoid further penalties, you have the option of removing the excess plus earnings or applying the excess to your 2007 Roth contribution. Any earnings you remove are taxable in the year of the contribution. If you are over the limit for 2007, you can make corrections penalty free until Oct 15, 2008 by withdrawing the excess plus earnings.

[jevd]

First, get IRS Pub 590 and read the section titled "What if you contribute too much?" in the Roth chapter. Pub 590 also has worksheets for figuring your Modified AGI (MAGI) for Roth contribution limits and your maximum Roth contribution.

If you are married filing jointly, the Roth contribution phaseout range for MAGI was $150K-$160K for 2006. This means that you could have made your full Roth contributions if your MAGI had been below the first number and zero if above the second number. In between, the limit declines more or less proportionally. The MAGI range is now adjusted each year for inflation. For 2007, the range is $156K-$166K.

The deadline for penalty free correction of 2006 excess contributions was Oct 15, 2007. You are now probably faced with the penalty of 6% of the excess. To avoid further penalties, you have the option of removing the excess plus earnings or applying the excess to your 2007 Roth contribution. Any earnings you remove are taxable in the year of the contribution. If you are over the limit for 2007, you can make corrections penalty free until Oct 15, 2008 by withdrawing the excess plus earnings.

After tax filing, earnings are not removed. See Pub 590 for complete explanation or IRC 408(d)(5)

Also see 408(A)(a) which states that Roth IRAs are treated as traditional IRAs unless otherwise stated in 408(A). 408(A) only mentions withdrawal of excess Roth contributions prior to tax filing date including extensions. PUB 590 is not as clear as it could be regarding corrections after tax filing but does state that contributions may be applied to the following year if available as stated above.