Roth contributions and AGI problems

[Guest Radiohead]

Looking for sound advice for this situation.

TY 2006 made excess contributions to ROTH IRA, paid the 6% excise penalty upon income tax filing.

TY 2007 made excess contributions to Roth IRA, paid 6% excise on TY '06 excess contributions and 6% excise on '07 excess contributions upon income tax filing.

TY 2008 will make excess contributions to Roth IRA, will still have to pay 6% excise on '06 and '07 contributions, but due to market conditons, value of Roth has lost ~ 50%.

401(K) is fully funded, and excess contributions are due to exceeding MAGI limits for Roth eligibility.

The Roth IRA does predate 2006, however majority of contributions are '06 or later.

Do not want to really give up on the Roth, because of tax free earning potential, but the 6% excise adds up, especially when the underlying securities have declined so much in value.

What is the best option?

[Appleby]

Looking for sound advice for this situation.

TY 2006 made excess contributions to ROTH IRA, paid the 6% excise penalty upon income tax filing.

TY 2007 made excess contributions to Roth IRA, paid 6% excise on TY '06 excess contributions and 6% excise on '07 excess contributions upon income tax filing.

TY 2008 will make excess contributions to Roth IRA, will still have to pay 6% excise on '06 and '07 contributions, but due to market conditons, value of Roth has lost ~ 50%.

401(K) is fully funded, and excess contributions are due to exceeding MAGI limits for Roth eligibility.

The Roth IRA does predate 2006, however majority of contributions are '06 or later.

Do not want to really give up on the Roth, because of tax free earning potential, but the 6% excise adds up, especially when the underlying securities have declined so much in value.

What is the best option?

Why not make non-deductible contributions to your traditional IRA and convert in 2010 when the MAGI capped is removed?

Take a peek at this article

[Guest SLO CA CPA]

not only should you consider making nondeductible ira for 08-2010 and then convert them to the roth in 2010 but you should consider recharacterizing the 08 roth to a traditional (in essence becoming your 08 nondeductible ira) and save the 6% exise tax for 08

[Guest shiftingtides]

Hi,

I have a similar situation with the thread starter. I contributed $5000 to my Roth IRA in May 08 but became sick and unemployed for the rest of the year. My total compensation for 2008 was about $1,500. I can withdraw the excess amount from the Roth IRA if it were still there. Unfortunately most of the contribution was wiped out in the fall of the markets. I had contributed in 07 ($4000) and the account balance is about $5000 right now. I don't know if I have to withdraw my excess contribution still or maybe even claim the losses. Any help with this is appreciated.

[Appleby]

Hi,

I have a similar situation with the thread starter. I contributed $5000 to my Roth IRA in May 08 but became sick and unemployed for the rest of the year. My total compensation for 2008 was about $1,500. I can withdraw the excess amount from the Roth IRA if it were still there. Unfortunately most of the contribution was wiped out in the fall of the markets. I had contributed in 07 ($4000) and the account balance is about $5000 right now. I don't know if I have to withdraw my excess contribution still or maybe even claim the losses. Any help with this is appreciated.

You should withdraw the excess in order to avoid the 6% penalty, You will need to calculate the net income attributable (NIA)/loss on the amount and withdraw the net amount. For instance, if the loss is $500, you would withdraw $3,000 ( $3,500-$500).

NIA formulae available here http://www.retirementdictionary.com/nia.htm

The following is from IRS Publication 590

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

590 available here www.irs.gov