What if my total income exceeds limit for Roth IRA during the year?

Question

I make regular contribution to my Roth IRA account. My income is below the gross income limit of $150,000 for married couple. But my wife is thinking about start working, so there's a possibility that our gross income will exceed $150,000 this year.

My question is: will I be penalized for the Roth IRA contribution I have already made if our combined income eventually exceeds the limit?

Thanks in advance for your answer.

Answer 1

I had this same question not too long ago.

If you overcontribute you are allowed to withdraw the excess contributions from the account with no penalty, so long as you do it before the april tax deadline the following year. I also believe there is a formula for determining how much of your gains are attributable to the overcontribution:

if
B= how much was in your account before the contribution
X= overcontribution amount
G= gain since the overcontribution amount was contributed

You would have to withdraw:
X/(X+B)*G in addition to the amount you overcontributed, and would pay income tax on this amount.

So if you overpay in 2007, you have until April 2008 to pull out the excess. It may be a good idea to start doing your '08 taxes early so that you know sooner how much, if any, you'll need to withdraw from your IRA account.

Answer 2

The short answer is yes, the phase-out will take place at combined income between $150-$160M. However, I'd strongly advise consulting with your CPA to consider all possiblities. For example, you'll have to consider if

1) any of your combined incomes are from self-employment (separate SEP might be possible, e.g.)
2) either of you could alternately invest in a company retirement plan (401k or 403b)
3) any of your income can be deferred to the next year

A good CPA should be able to help you explore all legitimate alternatives. Good luck.

Answer 3

I went over the limit on mine. Any past contributions can stay in the account and grow, but I had to take out 100% of what I put in for that year.

Make sure you take advantage of every possible pre-tax feature your company offers, hopefully you can stay just under the mark.

Answer 4

you may recharacterize the contributions as contributions right into a popular IRA. you may wager there'll be paperwork to end. No outcomes, no taxes for recharacterizing the contribution.

Answer 5

I hope that you have competent tax advice. At your income, Turbo tax will not do.