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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Avoiding penalty on excess IRA contribution
Tax Talk

Exceeding Roth IRA limits
 

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

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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.

Roth IRA phaseout limits:

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For purposes of determining excess contributions (on which the 6-percent penalty is based), any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is disregarded. This treatment only applies if any earnings on the contributions are also withdrawn.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.

Bankrate.com's corrections policy -- Posted: April 2, 2008
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