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 Dear
Tax Talk,
My wife and I set up Roth IRAs for 2006 on April
15, 2007, and timely filed our returns by that
date. Afterward, we realized we are over the income
limit for Roth eligibility. Is there a way to
convert the Roths to traditional IRAs, preferably
without penalty?
-- Bill
 Dear
Bill,
In order to contribute to a Roth IRA, your modified
annual gross income, or MAGI, has to be under
a certain threshold. In 2006, the Roth IRA contribution
is reduced if your MAGI is in excess of $150,000
for a married couple and not allowed when your
MAGI exceeds $160,000. For single taxpayers the
limits are $95,000 and $110,000, respectively.
If you make contributions you are
not entitled to make, you have until the due date,
including extensions, to withdraw the excess contributions.
If you fail to withdraw the funds, an excise tax
penalty of 6 percent is due on the contribution
for each year the ineligible contribution remains
in the account. Since you failed to withdraw the
funds and did not take an extension, you would
normally owe the 6 percent penalty for 2006. However,
under special relief provisions of Regs. Sec 301-9100-2,
you have until Oct. 15, 2007, to correct the excess
contribution.
To correct
the contribution, you can ask that the excess contribution be applied to 2007
or withdraw the funds and report any income on the funds in 2007. You cannot redesignate
the contribution as a deductible IRA for 2006 as the due date has passed. File
Form 1040X with IRS explaining that you withdrew the excess contribution to a
Roth IRA for 2006. On top of Form
1040X write in "Filed pursuant to Regs. Sec 301-9100-2." See Form
5329 line 23
instructions for more information. |
