2011 Income exceeded Roth IRA contribution limits while contributing.

[Guest Wanttoberichoneday]

Synopsis:

I opened a Roth IRA for my wife and I in 2011 through Bank of America Merrill Lynch. The account was opened late Sept 2011. i contributed $2700 to my wife's account and $3000 my account by the end of 2011. In Nov 2011, I won a small law suit which was added as income when I filed my 2011 taxes this year.

Normally, my wife's and I combined income averages $164,000 yearly. Due to the money won in the lawsuit, my income for 2011 became $186,400. (the lawsuit was settled at the last minute unexpectedly)

I just now realized that my income in 2011 exceeded the Roth IRA yearly salary rules. If I knew I was going to win the extra money, thus exceeding the salary limits or a Roth, I would have waited to open the Roth this year instead.

What are my options.

FYI: my yearly income for this year(2012) should not exceed $160,000, (i dont play the lottery nor expect to win any more lawsuits) so I know I can start to contribute again this year, but what do I do about the 2011 contributions? The 2011 contributions are tied up in stocks and mutual funds within the Roth IRA.

I searched the forum for this topic but did not ind anything.

[ETA Consulting LLC]

You should remove the excess amounts (plus earnings), typically by the end of your extended tax failing deadline for 2011. Are your taxes on extension?

[Guest Wanttoberichoneday]

You should remove the excess amounts (plus earnings), typically by the end of your extended tax failing deadline for 2011. Are your taxes on extension?

No, they are not. I just realized the error yesterday.

[masteff]

You might also talk to your investment firm... typically if you call in to their help line and ask to speak to an investment specialist, you'll get to someone w/ greater knowledge.

Off the top of my head, recharacterize the contribution from Roth to traditional IRA. I would suggest you consider making it as a nondeductible contribution. You would need to file an amended 1040 to submit a Form 8606. Then you could convert from a nondeductible traditional IRA to a Roth this year, subject to the rules on conversions. End result, same amount of money in a Roth IRA.

You should confirm the above is an option for your situation with both your investment firm and your personal tax advisor.

[Guest Wanttoberichoneday]

You might also talk to your investment firm... typically if you call in to their help line and ask to speak to an investment specialist, you'll get to someone w/ greater knowledge.

Off the top of my head, recharacterize the contribution from Roth to traditional IRA. I would suggest you consider making it as a nondeductible contribution. You would need to file an amended 1040 to submit a Form 8606. Then you could convert from a nondeductible traditional IRA to a Roth this year, subject to the rules on conversions. End result, same amount of money in a Roth IRA.

You should confirm the above is an option for your situation with both your investment firm and your personal tax advisor.

I called the investment firm who basically confirmed your suggestion as the best approach. They mentioned this type of situation happens all the time. Talking with my tax advisor right now to amend my 1040.

Thanks to all who replied to my question.