Roth IRA Eligibility Question

[Guest Wrestler]

I have made contributions to a Roth IRA since they were first authorized. In Jan. 2007 I made the full $4,000 contribution for the 2007 tax year. I now find myself ineligible for a Roth IRA due to my MAGI exceeding the limit. My question: How do I handle this? Can I merely call my investment company and tell them to move the money (principal and dividends for this year) out of the Roth IRA and into a traditional IRA? Do I have to file any forms with the IRS because of this? Should I wait to do this until Jan. 2008 or do it now? Please advise.

[Appleby]

If you want to move the amount to your traditional IRA, you may do so VIA a recharacterization. The recharacterization must include any applicable NIA to the contribution.

Your IRA custodian may require that you complete some paperwork; some will take the instructions over the telephone. It’s best to check with your custodian to determine what they need in order to process the transaction.

If your custodian does not calculate the NIA, you may refer to TD 9056 for instructions on how to determine the amount

You have up to the tax filing due date of your tax return plus extensions, to process the recharacterization. Click here for more

[Guest Wrestler]

Why can't I just call my investment company and tell them to move the this year's contribution from my Roth IRA to my Traditional IRA? Is there really a need to do anything else? This was an after tax contribution to begin with.

[Guest Wrestler]

Bottom line question: Do I have to file any IRS forms over moving the money from my Roth to my traditional due to being ineligible to have a Roth?

[Appleby]

Why can't I just call my investment company and tell them to move the this year's contribution from my Roth IRA to my Traditional IRA? Is there really a need to do anything else? This was an after tax contribution to begin with.

You can have your investment company move the contribution from your Roth IRA to your Traditional IRA. But there are only two ways to do this, if you want it to be done correctly, and without any penalties being assessed.

1) As a recharacterization, Or

2) as a return of excess (distribution) and redeposit the amount to your traditional IRA as a contribution.

For a return of excess, you still need to calculate the NIA and remove it from the Roth IRA, just as you need to do with the recharacterization. However, unlike the recharacterization, the NIA is not carried over to the traditional IRA.

Since you want to move the “principal and dividends” along with the contribution , then you would need to move the contribution VIA a recharacterization

The fact that this is an after-tax contribution has no bearing on how it is required to be corrected

See IRS publication 590 at www.irs.gov

[Appleby]

Bottom line question: Do I have to file any IRS forms over moving the money from my Roth to my traditional due to being ineligible to have a Roth?

It depends on what you eventually do with the contribution.

See the instructions for IRS Form 8606 at http://www.irs.gov/pub/irs-pdf/i8606.pdf. page 3 applies to recharacterizations

Publication 590 is also a good source on if and what forms you would need to file

[masteff]

Wrestler, I'd call your IRA company sooner than later. It'll avoid any undue complications.

[John G]

You also have a month left in this tax year. If you are close to the limit, perhaps you can defer a bonus to next year - you might want to wait until you are absolutely sure you are over the limit before acting.

Custodians typically need a simple letter of instruction - it take 30 minutes to draft one that includes the account numbers and an explaination. Note, that it may take them a while to actually execute the transaction, and YOU must actively watch your monthly statements to make sure it was done correctly. Don't assume they will get it correct.

Don't talk with a clerk at the front desk. Get directed to the IRA/Roth back office dpt. and get instructions from them. This happens a lot, they know the drill. They might even have a standard form!

You might just buzz you Congressman and ask him to support increasing the income tax threshold for Roths. A lot has changed in 8+ years.