 Avoiding
excise tax on Roth IRA
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 Dear
Tax Talk,
I bought shares worth $200 in a mutual fund toward my 2005 Roth
IRA on April 3, 2006. Unfortunately, this transaction brought my
total 2005 Roth IRA contribution to $4,200. I have already filed
my tax return for 2005. How do I correct this mistake? Can I simply
recharacterize this purchase as a 2006 Roth IRA contribution, as
my total 2006 contribution is only $300? Do I have to pay any additional
penalties or taxes?
-- Raghuram
 Dear
Raghuram,
If you were under age 50 at the close of 2005, the
most you could have contributed to your Roth IRA was $4,000. If you
were over age 50 in 2005, you could have contributed an additional $500.
In 2006, if you're over age 50, you can contribute an additional $1,000
($5,000 total) to a Roth or a traditional IRA.
Assuming you were under age 50, you overfunded your
Roth by $200. A 6-percent excise tax applies to any excess contribution
to a Roth IRA. However, if contributions to your Roth IRA for a
year were higher than the limit, you can apply the excess contribution
in one year to a later year if the contributions for that later
year are less than the maximum allowed for that year.
If you apply the contributions to 2006, you
may have to withdraw earnings, if any, for the excess contribution.
These amounts as computed by the custodian may need to be included
in your 2005 tax return in an amended filing, if material (which
I would define as more than $200 in additional tax).
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