Excess contribution to Roth take it out or leave it in.

[Guest cswan57]

In yr 2000, I contributed 2K to a roth IRA without realizing that there was a maximum income limit. Due to a severance package, I made in excess of the $95K max. While filing my taxes using Turbo Tax I realized I had to pay a penalty fee of about $90, which I paid because my investment was in tech stocks and worth 1/2 of its value. I have left the investment in the fund. In 2001, I will probably not hit the $95K income limit. Will I be penalized again if I leave the money in the Roth if I don't make more than the max income? Can I contribute another 2K in 2001 if I don't reach the max or do I have to skip a year?

[John G]

The excess contribution will always be an excess contribution since it is tied to the year of earnings. The excise tax will be an annual event until you correct the problem.

Because of the valuation flucations of the IRA and your income changes, I would recommend that you see an accountant about how to handle this. This year, you may have some option to income shift if your employer will slide a bonus into the next year. Mutual fund cap gain distributions, state tax refunds, etc. can be last minute factors that bump you income and change your qualification.

Last year, a friend was comfortably qualified until the NASDAQ class action law suit added $5k in the last couple of days in December. Hopefully, Congress will act to relax the income standards. It is hard to justify that a Roth is a great savings vehicle for someone making 94k but prohibited for someone making 110k... especially when the first person may live in Iowa and the second in NYC and the entire income difference is eaten up by taxes and higher cost of living.

[Guest Fishchick]

One way to remedy an excess contribution is to carry it forward to the next year. Assuming you are eligible in 2001, you can consider this to be a contribution for 2001. (Be careful not to contribute more, however, as this becomes your 2001 contribution, and anything more would be a further excess.) You file IRS form 5329 to pay the 6% penalty for 2000, and assuming you can use up the entire contribution for 2001, you should not owe any further penalties.

[Guest cswan57]

Thank you for your advice. I will qualify in 2001 to contribute the maximum (my AGI should be well under $95K), so I will rollover the contribution from 2000 to 2001. I will also check with Accountant friends to make sure I do it right. I already paid the penalty, so I should be fine. Thank you again.