Put money into a Roth IRA and now need to get it back out to avoid pen

[Guest csimard]

My wife and I each made (Schwab) $2000 Roth IRA contributions for 1999 and, as it turned out, we were ineligible. Due to a lack of knowledge on my part, we left the money in there and paid the IRS penalty. She also added $2000 to her Roth account back in January for tax year 2000 and we won't be eligible again this year. Am I best off having her sell the equities she purchased and transfer the cash into a standard IRA account? I assume that by doing this we will reduce the amount of associated penalties that we have to pay. We would just continue to pay the penalties from our 1999 investment. Thanks for any advice.

[JAMES PATRICK]

For the year 2000 contribution you can recharacterize to a traditional IRA, or you can have her withdraw the $2000 contribution plus earnings on it before 12/31. She would include the earnings in her income and probably pay the 10% penalty on the earnings.

Why are you leaving the 1999 excess contributions in there?

[Guest csimard]

How do I "recharacterize" her contribution to a traditional IRA? The money was put into her established Roth account, not her regular IRA account. Can I just call Schwab and give them a different (regular IRA) account number for the year 2000 contribution even though 11 months have passed?

Can I also remove the 1999 contributions without having to file an amended 1999 1040? If I remove my contributions I wouldn't have to pay the 10% on the earnings because the account decreased in value during the past year.

Thanks for trying to help me gain an understanding.

Craig Simard

[JAMES PATRICK]

Will you eligible to contribute to a Roth in the near future?

Do you and your spouse have pension plans?

Does either one of you have non-deductible IRA's at present?Depending on your answers it may be best (least paperwork) to close out everything or to recharacterize.