I invested my 2008 Roth IRA contribution in January of 2008. During the course of the year I exceeded the income limits to contribute to a Roth. What do I do now?
This is actually a very common situation and one that is very easy to rectify.
Technically, what has happened here is you have made an "excess contribution." Excess contributions can happen for a number of reaasons. In your case, an excess contribution occurred because the allowable contribution was reduced or eliminated due to your Adjusted Gross Income exceeding certain limits.
You could also have made an excess contribution if the total amount of your contribution exceeded your taxable compensation income, or if the total amount contributed to your Roth or traditional IRA exceeded the amount permitted for that year (for example, you contributed $6,000 to a Roth but you were under age 50 so you were only able to contribute $5,000).
To correct this situation, you need to take the money out or "recharacterize" the contribution as a traditional IRA contribution. If you don't pursue one of these two corrective actions, you will be hit with a penalty of 6 percent for every year the excess contribution remains uncorrected. The deadline for withdrawing the excess contribution or recharacterizing the contribution is your tax filing deadline plus any extension you may file.
When you withdraw an excess contribution, it is important to note that you also are required to take out any earnings (or losses) that are attributable to the original contribution. In your case, it is unlikely that you will have any earnings to worry about. But in cases where there is a gain, taxes would be due.
To recharacterize your contribution as a traditional IRA contribution, which is probably the better option, you will need to complete a recharacterization form. Your IRA custodian has these forms and they are fairly straightforward and easy to fill out. Again, gains and losses still need to be accounted for. When you pursue this option, it is as if your contribution was originally made to the traditional IRA and there is no tax due on any earnings.
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