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Old 06-24-2008, 07:02 PM   #1
blixet
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Roth & AGI
How does the irs know if you've reached the phase out limit on your AGI? Is this supposed to be self-policed? If you don't report Roth contributions how do they match it?
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Old 06-24-2008, 09:51 PM   #2
clydewolf
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Blixet,

In late May your IRA custodian sends the IRS and the IRA owner a report of the contributions made for the previous year (2007 at this time). This is form 5498:
http://www.irs.gov/pub/irs-pdf/f5498.pdf

Now the IRS has your MAGI, and what your annual contribution amount to your IRA.
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Old 06-25-2008, 09:33 AM   #3
blixet
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I see. What happens if you contributed the max but were actually in the early part of the phase out income wise?
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Old 06-25-2008, 09:47 AM   #4
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If you don't remove the excess amount before your tax return is due (April 15 for most), then you'll have an excise tax of 6% for that tax year. If you still have the funds in the account, there's no benefit to removing them now, assuming that you'll be making a contribution again for this tax year - the excess contribution can be applied to the subsequent year (rather than being required to be withdrawn). The 6% excise tax still applies.
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Old 06-25-2008, 11:02 AM   #5
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In reading here: http://www.fairmark.com/rothira/deadline.htm and it seems that I might be able to make a recharacterization even though I've filed before April 15. Is this correct?

I need to pull out my tax return to check, but I noticed my rebate check was substantially reduced and I'm sure it's because my AGI was too high. I'm really suprised my tax preparer didn't warn me since his program asks if we contributed and how much to the Roth IRA.
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Old 06-25-2008, 11:25 AM   #6
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Yes, I believe that is correct. So what you're doing is changing the contribution year of the excess funds to the current year.
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Old 06-25-2008, 11:42 AM   #7
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Well, we've already contributed for the current yr (08). So I think I need to have the trustee change the overage plus earnings (if any) to a traditional non-deductible IRA. I can reconvert it in 2010 to the Roth hopefully.

Trying to read the instructions on the IRS forms, I think I need to file an 8606 to report the portion now in the trad IRA, but since it's not deductible, I'm not sure if I need to file the 1040 x amended. They say report it on line 15a, but that's if it is to be deducted, I think. Maybe just the 8606 and a statement of my reasons.
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Old 06-26-2008, 10:05 AM   #8
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Yes, to complete the re-characterization reporting, submit form 8606 - and you will need to submit an amendment (1040X) along with it, even though the recharacterized amount is not deductible and so therefore the return will not change. Write “Filed pursuant to section 301.9100-2” on the amended return.
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Old 06-26-2008, 11:08 AM   #9
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Thank you very much. After reading the instructions for the 1040x I think I bascially just need to fill out the section on part II giving the reason for the change but don't need to fill in any of the front part lines 1-33 since nothing is changing. The 8606 should be easy.

I have to watch this for this year as well since even though the phase out limit has gone up I might get bitten again. It'll be easier to recharacterize if necessary before filing this time.

It was the large amount of cap gains and an increase in my dividends that bit me in '07. Since they mostly come in December, I will have to look closely at how much there is this year.

It turns out that the amount I could contribute to the Roth was printed on the cover sheet of my copy of my tax return, but I told the preparer we had already contributed the max and he didn't mention anything. I think I glossed over the paragraph when I looked at the return. Kind of a pain, especially since I will just reconvert it all to the Roth in '10.

Thanks again, Jim and Clyde.
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Old 06-26-2008, 11:59 AM   #10
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Not a problem... keep in mind, the amount that you re-characterize has to include the growth attributable to the excess contribution...

And, sometimes tax preparers are overwhelmed with "stuff" during the season and don't fully hear what you are telling them. Luckily you've discovered this in time and can resolve it simply.
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Old 06-26-2008, 02:19 PM   #11
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Quote:
Originally Posted by BlankenshipFP
Not a problem... keep in mind, the amount that you re-characterize has to include the growth attributable to the excess contribution...
I talked with the rep from the trustee about that and he says they will calculate it for me, but I will double check. Fortunately, there is actually some growth in that account.
Quote:
Originally Posted by BlankenshipFP
And, sometimes tax preparers are overwhelmed with "stuff" during the season and don't fully hear what you are telling them. Luckily you've discovered this in time and can resolve it simply.
He's usually very sharp. Does wear 2 hearing aids for a hearing disability but I don't think that was they reason since he did enter the info correctly. My bad for not reading thoroughly. Add another lesson.

Thanks again.
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Old 06-26-2008, 02:25 PM   #12
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Form 8606 is a stand-alone form. It does not need to be accompanied by a 1040 of any stripe.
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Old 06-26-2008, 02:35 PM   #13
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So, if I'm only reporting a change to a non-deductible traditional IRA, no changes to deductibilty, no income change, even though I filed before Apr 15 w/no extensions, I can get away with just the 8606 and some note of explanation? (sorry for the long, qualified question )
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Old 06-26-2008, 04:23 PM   #14
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Quote:
Originally Posted by clydewolf
Form 8606 is a stand-alone form. It does not need to be accompanied by a 1040 of any stripe.
I learn something new every day. I have always either included it with the original filing (if extended) or an x. Thanks clyde!
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Old 06-26-2008, 04:57 PM   #15
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How do dividends increase income? I thought dividends were taxed differently?

Or maybe I don't know the tax form well enough- maybe they are taxed lower, but still add into MAGI?
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