Excise taxes on a Roth IRA Tax Talk by George Saenz • Bankrate.com

Dear Tax Talk,
What happens if I put money into my Roth IRA for tax year 2006 right now, but when I file my 2006 tax return my adjusted gross income (AGI) happens to be above the AGI limit due to better than expected bonuses and/or higher salary. Thanks.
-- Ang

Dear Ang,
If you make contributions only to Roth IRAs, your contribution limit for 2006 will generally be the lesser of:

If you are age 50 or older in 2006, you can contribute an additional $1,000 to your Roth.

However, if your modified adjusted gross income is above a certain amount, your contribution limit may be reduced or eliminated.

Generally, you can contribute to a Roth IRA if you have taxable compensation (wages, self-employment income and taxable alimony) and your modified AGI is less than:

• $160,000 for married filing jointly or qualifying widow(er).
• $10,000 for married filing separately and you lived with your spouse at any time during the year.
• $110,000 for single, head of household or married filing separately and you did not live with your spouse at any time during the year.

A work sheet to figure modified AGI can be found in Publication 590. Since you can contribute during 2006 to your Roth IRA, and you might not know what your AGI is until the end of the year, you run the risk that come next April 15, you may have overcontributed to the Roth. If you leave the contribution there you could be subject to an excise tax of 6 percent for every year the excess contribution stays in the Roth IRA. Hence, you need to withdraw it to avoid this penalty.

Any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made. For example, if the original $4,000 deposit that you made in January 2006 earned $200 by the time you realized you couldn't make the contribution in April 2007, you would need to include the $200 in earnings on your 2006 Form 1040. If you think your AGI will go down in 2007, you can apply the $4,000 to that year's contribution.

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