Opened simple IRA instead of Roth IRA, HELP!

[bill123]

Hi,

In 2010 I had planned to open a Roth IRA. By mistake I opened a regular IRA instead. I contributed $5,000 to it. Thinking it was a Roth, I took no tax deduction for that contribution.

I don't have my exact AGI for 2010, but it was probably close to the top of the phase out range.

Last month I was looking at my account and noticed it was a regular IRA instead of a Roth IRA. I have already contributed $1,200 for this year.

How do I fix this?

My plan is to remove the $1,200 I contributed in 2011 and put the withdrawal down as "removing an excess contribution". Then I will open a Roth IRA and put the money in it.

For the $5,000 I contributed in 2010, can I just leave that money in the IRA since I never claimed a deduction for that contribution? I know I would be missing out on some tax advantages, but I am looking for the simplest solution to clean this up.

Any advice is appreciated.

thanks

[MonkeyMama]

Unfortunately, there is really nothing simple about this.

I would amend 2010 tax return to claim the IRA deduction. We are talking a decent tax refund here - don't give up the money just because it is a hassle.

Where did you open the account? Best bet is to talk to the company that holds the money - to determine the best way to handle this. It may be appropriate to remove it as an "excess contribution" and go from there. That may be the easiest way to handle it. (Keep the first $5k in the regular IRA - that would be fine).

You could also just convert the $1200 to a ROTH. The net tax effect would be $0. (Taxed on the $1200 conversion, BUT get $1200 deduction for IRA deduction).

The custodian of the account will know better what is easier for them to execute. Either way you have to open a new ROTH account, so why the conversion might just be easier. "Removing excess contribution" triggers tax consequences if there was any gain on the funds since you contributed them. I wouldn't expect it to amount to much (if anything) but it is just another complication.

[jpg7n16]

If you truly wanted a Roth IRA in the first place, instead of going through the hassle of refiling, recharacterizing, etc., just convert it to a Roth.

You have a basis of $5000 (since you never deducted), and see MM's post about the $1200. It's likely that the market hasn't gone up much since your initial contribution, and since you'd only be taxed on earnings, it'd make your conversion close to tax free.


So the easiest solution: just convert the whole account. Claim $1200 as a deductible contribution for 2011. Assume tax will be paid on the balance over $5000 for conversion.

[MonkeyMama]

Originally Posted by jpg7n16

If you truly wanted a Roth IRA in the first place, instead of going through the hassle of refiling, recharacterizing, etc., just convert it to a Roth.

You have a basis of $5000 (since you never deducted), and see MM's post about the $1200. It's likely that the market hasn't gone up much since your initial contribution, and since you'd only be taxed on earnings, it'd make your conversion close to tax free.


So the easiest solution: just convert the whole account. Claim $1200 as a deductible contribution for 2011. Assume tax will be paid on the balance over $5000 for conversion.

Good point!

This is fine, but you still have to report the nondeductible contribution to the IRS then, so they know not to tax the entire conversion.

Here is some good info if you go this route:

Forgot to File Form 8606 for Non-Deductible IRAs

Oh, but IRS charges a penalty for filing late. I don't know if they honestly charge this penalty though. (For some of these penalties they say they charge late fees, but they never really do).

[bill123]

I checked my 2010 taxes and my AGI is too high to take an IRA deduction.

I picked some lousy funds, so I have a loss . The account has $5,000 (from 2010), $1200 (from 2011) minus a $600 loss.

The fund is with ING. After reading your comments and more searching, I think I will.
1. File form 8606 (and pay the $50 late fee)
2. Withdraw the $1,200 I paid this year. ING gives an option for "Removal of excess contribution". They have a form I have to sign, notarize and mail in.
3. I am then plan to take the $1,200 and put it in a Roth IRA this year.

Does that sound reasonable?

thanks everyone!

[jpg7n16]

Originally Posted by bill123

2. Withdraw the $1,200 I paid this year. ING gives an option for "Removal of excess contribution". They have a form I have to sign, notarize and mail in.

Is your AGI too high this year to deduct for 2011?

If not, keep as is so you get to deduct $1200, but only pay tax to convert $600. Then for your remaining $3800, just contribute to the Roth (assuming you qualify).

[MonkeyMama]

Originally Posted by bill123

The fund is with ING. After reading your comments and more searching, I think I will.
1. File form 8606 (and pay the $50 late fee)

Just to be clear - don't pay the fee unless they ask for it.

Did you check if your AGI was too high for ROTH contributions? This year? I suppose there is no limit on ROTH conversions, these days. You can always fund your ROTH that way - just remember to file those 8606s. I am just wondering if your income is too high for the ROTH contribution, too.

[bill123]

My AGI for 2010 was 67,000. This year will be a little higher. I file single head of household and also contribute to my company's 401K.

If I am reading the tables right, that puts me just outside of being able to deduct for an IRA, but I should still be able to contribute to a Roth.

[MonkeyMama]

Originally Posted by bill123

My AGI for 2010 was 67,000. This year will be a little higher. I file single head of household and also contribute to my company's 401K.

If I am reading the tables right, that puts me just outside of being able to deduct for an IRA, but I should still be able to contribute to a Roth.

You got it right. Sounds good.

[GrimJack]

Originally Posted by bill123

My AGI for 2010 was 67,000. This year will be a little higher. I file single head of household and also contribute to my company's 401K.

If I am reading the tables right, that puts me just outside of being able to deduct for an IRA, but I should still be able to contribute to a Roth.

Bill, can you reduce your AGI by contributing to a 401k (you may already do this - just checking). There are no compensation limits to 401k contributions (considering the original intent of 401k this should not be a surprise).