I overfunded my Roth IRA by $4000 and have already filed for 2007. How can I fix this now?

Question

I am under 50 and put $4000 into a Roth IRA and $4000 into a Traditional IRA account for 2007 without realizing that the max you could put into both was $4000 total to both in any year. I filed my taxes by April 15, 2008. If I have the $4000 in the Roth IRA reclassified for this year, do I still have to pay the 6% excise tax? If I reclassify the amount by October 15, 2008 (latest date for extensions), can I avoid the excise tax? The IRS notes that taxes may be due on the earnings. I purchased stock & mutual funds within 14 days of putting cash into the Roth in July 2007. The net earnings on those investments was $25 for the year (it was not a great year). The account as a whole has $15,000 in it and earned about $350 throughout the year. Do I pay taxes on the earnings of $25 when I make the reclassification, or the prorated share of $350 (350 * 4000/15000 * 0.5 years)? Do need to file an amended tax return to report these earnings?

Answer 1

If you withdraw the money by 10/15, you can avoid the 6% excise tax; you pay income and penalty on the earnings.

If you do not withdraw the money, you can pay the 6% and then count the excess contribution as your 2008 contribution.

Stephen, he could never recharacterize--it put $4000 into an IRA as well.

Answer 2

Do you want to keep the contribution in the Roth IRA and use it as a deemed contribution for 2008?  If so, then all you need to do is amend your 2007 tax return and pay the 6% excise tax on the $4,000 contribution.  At this point there is no way to avoid the excise tax.

You do not have to pay tax on the earnings if you leave the entire contribution and earnings in your account and use it as a deemed 2008 contribution (assuming you qualify for the Roth IRA contribution).    You do not take a distribution and the recontribute it, that would trigger tax and penalty on the earnings.  

See IRS Pub 590 and IRS Form 5329 at irs.gov.

Answer 3

You only have until October 15 if you, prior to April 15, filed for an extension.  Otherwise, your return was due April 15.  "[If] You contributed more than you were entitled to in 2007. [then] You cannot recharacterize the excess contributions you made in 2007 after April 15, 2008, because contributions after that date are no longer timely for 2007." See publication 590 http://www.irs.gov/publications/p590/ch0...