Ask the tax adviser
By George Saenz • bankrate.com

What happens to excess Social Security tax payments; and early Roth IRA distributions.

Excess Social Security tax payments

Dear Tax Talk:
In 1999 I had two employers. My total wages exceeded the Social Security wage base limit of $72,600 so I was credited the overpayment for my portion of the Social Security tax when I filed my 1999 taxes.

My question is, what happens to the overpayment of the employer portion for the Social Security tax by my second employer? I understand that employers are only responsible for paying tax up to the same wage base limit that the employee is subject to.

Does the Social Security Administration automatically credit the overpayment to the second employer?

Do I need to inform my second employer that they overpaid the tax and to apply for a refund from the Internal Revenue Service or Social Security Administration?

Why can't I get credited for the overpayment since I am paying this tax in the form of lower wages?

Just please don't tell me that the government keeps this overpayment.

Thanks for your help.
Michael

Dear Michael:
Even though you don't want me to tell you, I'm sorry to report that the government gets to keep the excess Social Security paid by the second employer.

An employee pays Social Security taxes at the rate of 6.2 percent on their first $76,200 (in 2000) in annual wages. The wage base is indexed for inflation every year. An employer matches an employee's contribution up to the wage limit. If an employee switches jobs to an unrelated employer, the second employer is also responsible for withholding the taxes up to the same limit and matching the contribution.

An employee who has paid on wages in excess of the limit is entitled to claim the excess as a credit on Form 1040, Line 62 (referring to 1999 tax forms). In certain situations, if the second employer is related to the first, the second employer does not have to continue withholding and matching (this is common in a merger of two companies). If there is no relationship, the second employer is not entitled to a refund or to count the former employer's wages towards the threshold.

Getting money from a Roth IRA

Dear Tax Talk:
Is it correct that I can withdraw contributions from my Roth IRA penalty free at any time? For example, in 1998 and 1999 I contributed $2,000 each year and in 2000 my IRA is worth $5,000. I can withdraw $4,000 penalty free because it is income in which I contributed that has already been taxed?

Please explain.
Michael

Dear Michael:
The great thing about Roth IRAs is that qualified distributions are tax free, including the growth or income. However, in order to be a qualifying distribution you must, above all else, have had the account for five years. So the earliest that a complete Roth IRA distribution can be made tax and penalty free is in 2003, since Roth IRA's were not allowed until 1998. (2003 would be the earliest if you made your 1998 contribution in 1998, otherwise, if you made your 1998 contribution in 1999 it would be 2004).

The next great thing about Roth IRAs is that distributions prior to the five years do not include growth or income until the individual has recovered his regular (nondeductible) contributions. The recovery of the regular contributions is tax and penalty free regardless of your age. In your case if you withdrew the $4,000, you would not owe any tax or penalty.

You can check out other retirement saving options, rules and news at bankrate.com's IRA center.

-- Posted Sept. 22, 2000

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