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Dear Tax Talk,
My wife contributed the max of $4,000 to her Roth IRA account in early 2007 (February or March 2007) for the tax year 2007. We
just realized after reviewing our returns from our investment that we will be over the income limit when we take into account
our dividend and capital gain. Can we still withdraw our money from the Roth IRA account before the tax filing deadline? Are we
going to be penalized for the withdrawal if we withdraw before the filing date? Do we have any other option?
-- Oscar
Dear Oscar,
For 2007, your Roth IRA contribution limit is reduced (phased out) in the following situations:
The maximum contribution in 2007
for an individual is $4,000, or if the individual
is age 50 or older before the end of the tax year,
the maximum is $5,000. In 2008 these limits are
increased to $5,000 and $6,000, respectfully.
If you participated in a 401(k) plan
and the employer who maintained the plan went
into bankruptcy in an earlier year, you may be
able to contribute up to $7,000 to your Roth IRA.
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As you point out, you can make a contribution
to a Roth IRA anytime during the tax year and
up to April 15 of the following year. If you contribute
more than you are allowed, your excess contribution
is subject to a 6-percent excise tax penalty.
For purposes of avoiding the penalty, you can
either redesignate or withdraw the excess contribution.
If contributions to your Roth IRA for any one year were more than the limit, you can apply the excess contribution for
that year to a later year if the contributions to the later year are less than the maximum allowed for that particular year. For example,
you would tell your IRA custodian to re-designate the 2007 contribution as a 2008 contribution, provided you haven't already
contributed for 2008.
For purposes of determining excess contributions (on which the 6-percent penalty is based), any contribution
that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is disregarded. 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treatment only applies if any earnings on the contributions are also withdrawn.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. Whether re-designated or withdrawn, the earnings should be reported on line 15b
of your 2007 Form 1040.
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