Excess Roth Contribution - or not?


B

BeachTax

Here's the situation, client makes full 2006 Roth
contribution in January. Due to cashflow issues he withdraws
$2000 in July. Question is, can he replace the $2000 in his
Roth account this year, or would that be considered an
excess contribution?
 
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P

Phil Marti

BeachTax said:
Here's the situation, client makes full 2006 Roth
contribution in January. Due to cashflow issues he withdraws
$2000 in July. Question is, can he replace the $2000 in his
Roth account this year, or would that be considered an
excess contribution?
It would be an excess contribution. Note the ordering rules
on nonqualified distributions. They come first from
contributions, so if the $2,000 hadn't been contributed, it
wouldn't be there to withdraw.
 
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A

A.G. Kalman

It would be an excess contribution. Note the ordering rules
on nonqualified distributions. They come first from
contributions, so if the $2,000 hadn't been contributed, it
wouldn't be there to withdraw.
I have to differ with Phil. Any return of a contribution
that is made before the due date of the tax return is
considered to be a contribution never made (this rule
applies to Roth & Traditional IRAs).

To make this a nice clean transaction, one should withdraw
the $2000 plus any earnings. One could then deposit another
$2000 to the Roth IRA with impunity. The earnings are
subject to tax. They are also subject to the 10% penalty if
the taxpayer has not reached age 59 1/2.

The 1099-R should reflect the full distribution. The taxable
amount would just be the earnings. I would also attach a
statement that explains the complete transaction and
documents that only $4000 or whatever was contributed..
 
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