Excess Roth IRA Contribution 2010

[Chowdahead]

I have a Single client who has an AGI of $109,000. He contributed $4800 to his Roth IRA in 2010. However, the program is showing an excess contribution of $1,260 on form 5329. I know that the phaseout is between $105,000-120,000.

First, does this phaseout amount sound right?

Secondly, if he did contribute excess, if he withdraws it by April 17, 2011, can he avoid the penalty?

[Catherine]

Haven't checked on the first question.

Second question -- yes, if the excess is withdrawn by 4/15 there's no penalty. The twist I'm trying to determine for one of _my_ clients is if re-characterizing the excess as a 2011 contribution (it was all made during calendar 2011) will _also_ suffice for penalty avoidance.

Catherine

[Gail in Virginia]

Yes, re-characterizing it is the same as if he/she withdrew it and then contributed it for 2011. Bur remember, they have to withdraw the excess contribution and any earnings before April 18th. Depending on timing this might result in the earnings being coded as for the previous tax year which would mean they should go on the tax return you are currently preparing not the one next year. At least that is the way I understand that code on the 1099 they will get. That should not apply to Catherine's situation since the contribution was made in 2011.

As far as Chowdahead's first question, if his/her modified AGI is 109,000 then he/she exceeds the limit by 4,000 you divide that by the 15,000 spread in the limit and multiply it by the maximum contribution (either 5,000 or 6,000) depending on his age. That will give you the amount the limit is reduced by for this taxpayer. Using your numbers I did not get the same answer when I hurriedly did the computation. BUT the AGI might need to be modified if he deducted student loan interest, foreign earned income, or several other things. Publication 590 has all the details.