|
Dear Tax Talk,
If I have excess contributions to my Roth IRA, is the 6-percent excise tax levied against only the contributions
or against both the contribution and the earnings? If I go ahead and pay the excise tax, are the tax benefits the
same later on, i.e., not paying taxes on the withdrawals after I am 59½ years old?
-- Boardman
Dear Boardman,
It never makes sense to pay the 6-percent excise tax; you need to get the money out of the account as soon as you
become aware of the over-contribution. Paying the excise tax doesn't change the income tax consequences; distributions
from a Roth IRA are tax-free.
Generally, Roth IRA contributions for tax year 2007 have to meet certain modified AGI criteria. The
modified AGI limits are indexed for inflation annually, so the 2008 limits will be higher.
 |
| When Roth IRA contribution is not permitted: |
|
|
| • |
An individual does not have wages or net self-employment income at least equal to
the contributions. |
| • |
Or an individual's modified AGI exceeds certain thresholds. |
|
If you make a contribution to an IRA when you are not eligible, the IRS charges you an excise tax
equal to 6 percent of the contribution for each year that the money remains in the account.
|
| Criteria for modified AGI in 2007 |
|
|
| Individuals must have AGI less than: |
| • |
$166,000 for married filing jointly or qualifying widow(er). |
| • |
$114,000
for single, head of household or married
filing separately and you did not live
with your spouse at any time during
the year. |
| • |
$10,000 for married filing separately and you lived with your spouse at any time
during the year. |
|
The excise tax is based on the ineligible contribution not the earnings. For example, if you make
an ineligible contribution of $4,000 for 2007, the IRS will charge you $240. If you withdraw the excess prior to the
due date of your 2007 return including extensions, there is no excise tax. When you withdraw the ineligible contribution
you have to include any earnings in income.
|
