Roth contribution and penalties?

[Guest Brian McMullen]

My wife and I recently found out (by using TurboTax)that we shouldn't have contributed to a Roth IRA in 2000. It says we will get a penalty because our income was over the limit (due to selling stocks). We have "backed out" the $2K Roth and have received the $2K. What, if any, is the penalty for this? Will we even get a penalty since the Roth was basically dissolved? Or was it dissolved too late since we contributed in 2000 but dissolved it in 2001?

Thanks for any advice.

[Michael Devault]

There is a 6% excise tax on excessive contributions made to a Roth IRA. However, if you withdraw the excess contribution, and earnings on the excessive contribution, on or before the due date (including extensions) for filing your income tax return, the amount withdrawn is treated as not contributed.

You need to make sure that when you "backed out" the contribution, you also received earnings on the contribution.

[Guest Brian McMullen]

Thanks for the reply.

So, does that mean that we still have to claim it (per TurboTax) or do we act as if we never did the Roth?

Still confused as to what to do.

[Michael Devault]

According to the instructions for Form 8606, you proceed as if you never contributed to the Roth IRA in the first place.

[Guest John Pastore]

http://www.unclefed.com/Tax-Bulls/2000/00n...noticessum.html

Check out notice 2000-39. It has additional information that may be helpful.

What if you decide to leave the excess 2000 in the Roth account? Does the $120 penalty on the 1040 line 54 (6%) continue every year until you withdraw the excess? or is it a 1 time penalty?

[BPickerCPA]

Every year until you withdraw it.

[Guest John Pastore]

Appreciate the reply...

Continuing on the thread where one decides to leave the excess contribution in the Roth IRA:

Year 2000 , one contributes an excess of $2000. Taxpayer leaves investment in ROth and pays the 6% Penalty.

Year 2001, AGI is below restriction level and tax payer does not contribute anything. Can the $2000 contributed in year 2000 be used as a contribution to year 2001? Or does the IRS keep penalizing for not withdrawing the excess for year 2000?

Just trying to understand options available. I have not read anywhere that you have to remove the investment, otherwise why would there be a 6% penalty. Meanwhile the investment is earning a double digit percentage tax free in some (non technology) investment. Why would one remove it?

Thanks.

[BPickerCPA]

If you make an excess contribution in one year, you can count it as a contribution in a future year, if you are eligible in that year.

To answer your second question, you cannot get tax free income from an excess contribution. You must first remove the excess contribution AND THE APPLICABLE INCOME, and the income is taxable. So the notion of leaving it there to earn tax free income is erroneous.