Undoing my '08 Roth contribution?

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Undoing my '08 Roth contribution?

Postby Easy Rhino » Sun Nov 02, 2008 12:22 pm

I made my 08 Roth IRA contribution in January.

Needless to say, every investment in the Roth has declined in value.

Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?
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Re: Undoing my '08 Roth contribution?

Postby caklim00 » Sun Nov 02, 2008 12:37 pm

Easy Rhino wrote:I made my 08 Roth IRA contribution in January.

Needless to say, every investment in the Roth has declined in value.

Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?
Maybe someone else can calrify this, but I don't think you can "undo" it. But, I believe you can re-characterize it as a traditional IRA (so you can take the tax deduction) and then next year you can convert from a traditional to Roth.

I know if you convert part of a traditional IRA to Roth in a given year you are allowed to re-characterize that money as a Traditional prior to year end...
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Re: Undoing my '08 Roth contribution?

Postby HueyLD » Sun Nov 02, 2008 12:48 pm

Easy Rhino wrote:I made my 08 Roth IRA contribution in January. Needless to say, every investment in the Roth has declined in value. Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?


Yes. See quote from the IRS Pub 590 below.
If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.
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Postby Easy Rhino » Sun Nov 02, 2008 1:20 pm

Alright, but would I be able to withdraw my contribution (with net losses), and then re-contribute a full $5000?

(I know, I know, I just haven't delved through 590 yet).
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Postby LH2004 » Sun Nov 02, 2008 1:26 pm

Easy Rhino wrote:Alright, but would I be able to withdraw my contribution (with net losses), and then re-contribute a full $5000?
Yes. And you should.
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Postby paulob » Sun Nov 02, 2008 1:34 pm

LH2004 wrote:
Easy Rhino wrote:Alright, but would I be able to withdraw my contribution (with net losses), and then re-contribute a full $5000?
Yes. And you should.


I wonder if you could elaborate on this. If I have a $5,000 contribution in January, with subsequent losses, I would be able to withdraw less than $5,000 and then contribute to a regular IRA a full $5,000?
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Postby LH2004 » Sun Nov 02, 2008 1:52 pm

paulob wrote:
LH2004 wrote:
Easy Rhino wrote:Alright, but would I be able to withdraw my contribution (with net losses), and then re-contribute a full $5000?
Yes. And you should.
I wonder if you could elaborate on this. If I have a $5,000 contribution in January, with subsequent losses, I would be able to withdraw less than $5,000 and then contribute to a regular IRA a full $5,000?
Yes.

You can withdraw your contribution together with "earnings." You figure that based on the change in value of the account you contributed to only (NOT any other IRA's you have). For example, if you contributed $5000 to an IRA which had $20,000 immediately before the contribution, then the contribution was 1/5 of the account; if the account value has now fallen to $15,000, you would have to withdraw 1/5 of that, or $3000, to remove the full contribution.

At that point it's as if you never contributed in the first place, so, for this year, you could immediately contribute the full $5000 limit if you wanted to.

In general it only makes sense for Roth IRA's. With a traditional IRA, you don't get additional basis, and it looks like at least the IRS takes the position that you can't deduct the loss (even though any gain would be taxable), so the net result is that you are contributing money, with no deduction today, and will pay tax on it and its growth when you withdraw it. With a Roth IRA, in contrast, there's no deduction either way, and no tax at withdrawal either way as long as it's qualifying, so, as long as your withdrawals will be qualifying, the net effect is exactly the same as if you could just make an extra Roth IRA contribution, which is a good thing.
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Postby dgrdfd » Sun Nov 02, 2008 2:51 pm

That's interesting. I had no idea this could be done even though I guess I knew you could withdraw the money penalty free (minus earnings). I just didn't put it all together.

Since my $5,000 Roth IRA contribution at the beginning of the year looks more like $3,500 it's definitely worth thinking about to squeeze a little extra out of it.
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Postby oneleaf » Sun Nov 02, 2008 3:08 pm

Wow interesting.
Do i have to notify the custodian my intentions, so that they characterize the distribution properly? Or is this just a regular distribution that I would then just need to report properly on next year's tax return?

If I do this, I should be able to get an extra $1,500 or so into my Roth IRA this year. Seems worth it.

One issue I see is that Vanguard already shows me as having contributed $5,000 for 2008. If I withdraw, and then try to do another contribution, will they let me do it? They may not allow me to make that additional contribution as they already show me as maxed out for the year.
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Postby dgrdfd » Sun Nov 02, 2008 3:26 pm

oneleaf wrote:Wow interesting.
Do i have to notify the custodian my intentions, so that they characterize the distribution properly? Or is this just a regular distribution that I would then just need to report properly on next year's tax return?

If I do this, I should be able to get an extra $1,500 or so into my Roth IRA this year. Seems worth it.

One issue I see is that Vanguard already shows me as having contributed $5,000 for 2008. If I withdraw, and then try to do another contribution, will they let me do it? They may not allow me to make that additional contribution as they already show me as maxed out for the year.


I was looking around at Vanguard and had the same questions as you. I planned to call and speak with someone about this tomorrow. With no intentions of following through with it, I went to my account and was trying to see what I had to do to transfer my Roth IRA money to my VMM account (so I could combine it with extra funds and later recontribute to my 2008 Roth IRA). But when I clicked the sell button I got the "you're not 59.5 junk" so I figured I would call a real person and see about it.

To anyone who has done this, can you tell them to simply undo the 2008 contribution or do I have to say I want $X dollars removed? Because X varies on a day to day basis.
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Postby oneleaf » Sun Nov 02, 2008 3:30 pm

dgrdfd wrote:I was looking around at Vanguard and had the same questions as you. I planned to call and speak with someone about this tomorrow. With no intentions of following through with it, I went to my account and was trying to see what I had to do to transfer my Roth IRA money to my VMM account (so I could combine it with extra funds and later recontribute to my 2008 Roth IRA). But when I clicked the sell button I got the "you're not 59.5 junk" so I figured I would call a real person and see about it.

To anyone who has done this, can you tell them to simply undo the 2008 contribution or do I have to say I want $X dollars removed? Because X varies on a day to day basis.


Please let us know what the Vanguard rep says! :)

One thing I'm concerned is that if I remove contributions, I have to exchange out of a fund, which will have short-term trading restrictions for 60 days. I wonder if Vanguard can just add the $1.5K or so from my taxable account to Roth, and do all the paperwork adjustments behind the scenes. :D
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Postby LH2004 » Sun Nov 02, 2008 4:28 pm

dgrdfd wrote:To anyone who has done this, can you tell them to simply undo the 2008 contribution or do I have to say I want $X dollars removed? Because X varies on a day to day basis.
I haven't done it, but I would expect that Vanguard would be able to do it for you.

Doing this just because you have losses you want to make up is a creative, aggressive strategy, but lots of "normal" people do this for more mundane reasons all the time -- like when they discover that their income is too high for a Roth contribution or to deduct a traditional IRA contribution. So I would think that any IRA custodian is pretty familiar with the process (which is not to say that every person that answers the phone will be).
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Postby EmergDoc » Sun Nov 02, 2008 4:43 pm

I never thought about this. This would allow me to stuff an extra $1500 or so into each of our Roth IRAs this year.

Will someone please do this and tell us how it goes?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Postby Greenberry » Sun Nov 02, 2008 5:06 pm

I don't think this will work. From what I recall about the rule that allows you to undo the Roth contribution, taking advantage of it prevents you from making any further contributions this year. That's a recent tax law change due to this loophole.

I don't have a citation, though, and could easily be wrong and/or thinking of recharacterizing an IRA->Roth conversion. Still, might be worth getting authoritative advice on whether withdrawing allows you to recontribute so you don't lose your ability to do a roth this year.
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Postby celia » Sun Nov 02, 2008 5:51 pm

Greenberry wrote:I don't think this will work. From what I recall about the rule that allows you to undo the Roth contribution, taking advantage of it prevents you from making any further contributions this year. That's a recent tax law change due to this loophole.

Although this makes sense, what would prevent you from opening a NEW IRA at Vanguard or elsewhere?

In regards to the original post, even if it is allowable to withdraw and start over, don't forget that your money would be out of the market for a little while. What if the fund value went back up to its January value (or even higher)? You might end up doing all this for nothing!
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Postby HueyLD » Sun Nov 02, 2008 6:03 pm

Greenberry wrote:From what I recall about the rule that allows you to undo the Roth contribution, taking advantage of it prevents you from making any further contributions this year. That's a recent tax law change due to this loophole.

I don't have a citation, though, and could easily be wrong and/or thinking of recharacterizing an IRA->Roth conversion. Still, might be worth getting authoritative advice on whether withdrawing allows you to recontribute so you don't lose your ability to do a roth this year.


Greenberry,

I think your memory may not be working right. The special provision for withdrawing CURRENT YEAR contribution without penalty is still the law. You may be thinking about withdrawing from previous years' contributions.
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Postby Easy Rhino » Sun Nov 02, 2008 6:29 pm

Okay, if I'm following Pub 590 correctly:

- The only way to "tax loss harvest" a loss would be if I liquidated all my Roths entirely. And then the loss would be considered a misc deduction, and subject to the 2% of gross income floor. Depressingly, I might just qualify for this. But I'd also unshelter a substantial amount of money that's currently tax-sheltered, so this would not seem to be a good option for most.

- The deadline to do any of this is the tax filing time. (April)

- So, therefore, the best I can really accomplish would be to "refill" the Roth with a full $5000 contribution at some point this year.

I could currently, say withdraw $3000, then recontribute $5000. Or, if I wait, and the market rebounds smartly, I might end up withdrawing $4000, then recontributing $5000.

- There are no real tax concerns to my timing.

- There may be a "market timing" concern, in that if I manage to refill the Roth at exactly the correct market bottom, it may be worth more later down the road.

- Therefore, my guess is that it would make sense to delay action until early 09 to see how things will shake out.

How does that sound?
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Postby ppc » Sun Nov 02, 2008 6:39 pm

When you undo your Roth contribution, according to the instructions on Pub 590 you need to report the earnings on Form 5329 and pay 10% tax on the earnings.

In the example given above you originally contribute $5000 and have negative earnings of $2000, so you would withdraw $3000 and report
negative earnings of $2000 on Form 5329. I didn't see any instructions that state that negative earnings would be set to 0.

This would give you a $200 tax credit as well as being able to re-contribute the $5000 later. Thus, you could put an extra $2000 into your Roth IRA as well as get a $200 tax credit.

Is my understanding correct here, or does anyone have information that this interpretation is not correct?
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Postby dgrdfd » Sun Nov 02, 2008 6:42 pm

ppc wrote:When you undo your Roth contribution, according to the instructions on Pub 590 you need to report the earnings on Form 5329 and pay 10% tax on the earnings.

In the example given above you originally contribute $5000 and have negative earnings of $2000, so you would withdraw $3000 and report
negative earnings of $2000 on Form 5329. I didn't see any instructions that state that negative earnings would be set to 0.

This would give you a $200 tax credit as well as being able to re-contribute the $5000 later. Thus, you could put an extra $2000 into your Roth IRA as well as get a $200 tax credit.

Is my understanding correct here, or does anyone have information that this interpretation is not correct?


I am pretty sure your understanding is incorrect. You can't TLH your ROth IRA.
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Postby dgrdfd » Sun Nov 02, 2008 6:45 pm

Easy Rhino wrote:
I could currently, say withdraw $3000, then recontribute $5000. Or, if I wait, and the market rebounds smartly, I might end up withdrawing $4000, then recontributing $5000.


But if you refilled your Roth IRA with 2k now (in your example you used a 33% gain from 3k to 4k) instead of only gaining 1k you would gain 33% of 5k which is 1.66k. So waiting is only best if the market goes down after you refill.

So if you can indeed do this it's best to refill at the bottom (whenever the heck that is :D)

If you think we are at it, do it ASAP. If you think not, probably waiting until 2009 is best.
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Postby HueyLD » Sun Nov 02, 2008 6:51 pm

ppc,

The OP's question has nothing to do with Form 5329. It won't be an early withdrawal and Form 5329 is NOT required. Instead, he will need to fill out Form 8606 and show "ZERO" income. The income cannot be negative.
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Re: Undoing my '08 Roth contribution?

Postby seugene » Mon Nov 03, 2008 12:11 am

Easy Rhino wrote:Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?

Here is what I got in response to this question over at Fairmark. And here is somebody else :lol: getting the idea.
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Re: Undoing my '08 Roth contribution?

Postby dgrdfd » Mon Nov 03, 2008 8:34 am

seugene wrote:
Easy Rhino wrote:Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?

Here is what I got in response to this question over at Fairmark. And here is somebody else :lol: getting the idea.


Thanks for that. I plan to call this evening (7 or 8 CST) and I will report back here with what Vanguard officially says about the process since it does look like this is legal.
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Re: Undoing my '08 Roth contribution?

Postby simplesimon » Mon Nov 03, 2008 12:58 pm

seugene wrote:
Easy Rhino wrote:Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?

Here is what I got in response to this question over at Fairmark. And here is somebody else :lol: getting the idea.


Hahaha, ClimberDoc, really? :D

I also think this is a pretty interesting idea.
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Postby dgrdfd » Mon Nov 03, 2008 3:37 pm

I don't have much time but I just called and was told by Vanguard that withdrawing and then recontributing more would be considered an excess contribution. So this won't work according to the lady I spoke with.
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Postby Quidnam » Mon Nov 03, 2008 4:32 pm

dgrdfd wrote:I don't have much time but I just called and was told by Vanguard that withdrawing and then recontributing more would be considered an excess contribution. So this won't work according to the lady I spoke with.


I think you're right. Sorry to disappoint folks, but I do believe making a withdrawal has zero relationship with the amount that you have contributed in that tax year (in the historical sense). Once you've contributed $5,000, you've contributed $5,000. You can recharacterize, take a distribution, whatever, but the next $1 is an excess contribution for that year.
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Postby caklim00 » Mon Nov 03, 2008 4:37 pm

dgrdfd wrote:I don't have much time but I just called and was told by Vanguard that withdrawing and then recontributing more would be considered an excess contribution. So this won't work according to the lady I spoke with.

My thoughts are if this really is a legitamate option, then why haven't I heard about this before. Maybe its that most aren't as tax-savvy as us, but I still find it strange that this is the first time I'm hearing of the option to withdraw the Roth Contribution and subsequently make another $5000 Roth Contribution in the same year...
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Postby simplesimon » Mon Nov 03, 2008 6:07 pm

So we can't protect any more money from the government than they allow us to? :(
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Postby HueyLD » Mon Nov 03, 2008 6:27 pm

dgrdfd wrote:I don't have much time but I just called and was told by Vanguard that withdrawing and then recontributing more would be considered an excess contribution. So this won't work according to the lady I spoke with.


dgrdfd,

I suggest that you call again and ask to speak to someone in the IRA/Retirement Products department. The rep you talked to did not have adequate knowledge about IRA to answer your question correctly. You will want to quote the section of the Pub 590 (see my post above).

I had prior experience with the first line phone rep about some IRA questions and that person was obviously ignorant of the more complex IRA issues. I finally asked to speak to someone who worked in the IRA department and was able to get my issues resolved.

Best of luck to you.
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Postby dgrdfd » Mon Nov 03, 2008 7:06 pm

I called and spoke with someone else. This lady said that it's unfortunate my Roth IRA has gone down, but once you put the $5,000 in you have already put the max in for the year. If you withdraw funds (3.5k) you have 60 days to put the 3.5k back in. If you don't put it back in, you get to put nothing more in for the Roth IRA for the corresponding year. If you do put more than 3.5k it's considered an excess contribution.

If this is true, then it doesn't really seem like a good idea to use a Roth IRA as your emergency fund like I have seen some suggest. Suppose you max it out in January and need it in March or April. If you withdraw and don't get enough money to put the money back in until after the 60 days is up, then your Roth IRA is blown up for the year.

If someone else calls and gets something different maybe this can be reopened, but as of now I think this myth is busted (unfortunately)
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Postby oneleaf » Mon Nov 03, 2008 7:51 pm

How about recharacterizing it as a traditional IRA? That would allow you to take the $5K deduction on your taxes. Later on, you can convert any amount to Roth.
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Postby LH2004 » Mon Nov 03, 2008 10:08 pm

dgrdfd wrote:If someone else calls and gets something different maybe this can be reopened, but as of now I think this myth is busted (unfortunately)
Unless the woman who you talked to is a high-ranking official at the Treasury Department, what she said doesn't matter. I assure you Vanguard is capable of doing this; if they aren't, find a better IRA custodian.

Please don't call the law a myth.
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Re: Undoing my '08 Roth contribution?

Postby tom0153 » Mon Nov 03, 2008 10:46 pm

simplesimon wrote:
seugene wrote:
Easy Rhino wrote:Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?

Here is what I got in response to this question over at Fairmark. And here is somebody else :lol: getting the idea.


Hahaha, ClimberDoc, really? :D

I also think this is a pretty interesting idea.


I'd suggest going on over to a bread and butter guy to ask this question - Ed Slott. This is a big topic for him and his army of IRA advisors. You can put questions to them over there. There are similar discussions going on, such as at http://www.irahelp.com/phpBB/viewtopic.php?area=&t=2319

Best,
Best, Tom
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Postby minesweep » Mon Nov 03, 2008 11:33 pm

A couple of WSJ articles regarding recharacterization :

Do It Over

Changing Your Mind

Mike K
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Postby TA_Lurker » Tue Nov 04, 2008 12:03 am

dgrdfd wrote:If someone else calls and gets something different maybe this can be reopened, but as of now I think this myth is busted (unfortunately)


This is my first post, I've been a lurker for a few months, but this thread has really struck my curiosity, and not just because i'm in the same position as the original OP. I also work in a Transfer Agency environment so I think I have something to add here.

I think the thread to date has followed the wrong path. We should be discussing Excess Contributions and the return of an excess from a Roth instead of discussing redemption rules. Normally Excess Contributions are subject to a 6% tax but given that we live in interesting times I think it could make sense to think about the following:

    1) Open a new Roth IRA account with a non-Vanguard mutual fund company and fully fund another year 2008 Roth IRA Contribution
    2) Notify Vanguard that the OP made an Excess Contribution to her Vanguard Roth IRA account.
    3) Vanguard will refund the contribution plus any earnings. The earnings, if there are any, will be subject to your regular income tax rate while the original contribution will be subject to a 6% tax
    4) Transfer the non-Vanguard mutual fund into Vanguard some time in the future

Under normal circumstances that 6% tax is a big enough of a hit to make this market-timing scheme unprofitable, but given the huge drop in valuation we've seen this year it's possible one would be better off in the long run following my scenario.

Note: The previous writing is not tax advice. I no longer work in an IRA processing environment and am not up to date with all the relevant IRS rulings. The above scenario was dreamed up by me after I reread IRS Form 590 and several internal TA legal manuals. I have not settled on any of the merits of my scenario.
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Postby Easy Rhino » Tue Nov 04, 2008 12:15 am

TA Lurker, if I understand your scheme correctly (and I probably don't), you still end up with only $5000 contributed to a Roth IRA this year, right? But you have also have to pay 6% of $5000 penalty ($300)?

My scheme, if it works, would leave you with $5000 contributed to a Roth, but no penalty. Just a lot of paperwork.
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Postby LH2004 » Tue Nov 04, 2008 1:03 am

TA_Lurker wrote:I think the thread to date has followed the wrong path. We should be discussing Excess Contributions and the return of an excess from a Roth instead of discussing redemption rules.
What are redemption rules?

    1) Open a new Roth IRA account with a non-Vanguard mutual fund company and fully fund another year 2008 Roth IRA Contribution
    2) Notify Vanguard that the OP made an Excess Contribution to her Vanguard Roth IRA account.
    3) Vanguard will refund the contribution plus any earnings. The earnings, if there are any, will be subject to your regular income tax rate while the original contribution will be subject to a 6% tax
    4) Transfer the non-Vanguard mutual fund into Vanguard some time in the future
Under normal circumstances that 6% tax is a big enough of a hit to make this market-timing scheme unprofitable, but given the huge drop in valuation we've seen this year it's possible one would be better off in the long run following my scenario.
There is no 6% penalty as long as the excess contributions are removed by the due date of the return. Other than that, what you're describing is the right way to do this, except that there is no need to go to the trouble of opening a separate IRA and rolling over.
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Postby oneleaf » Tue Nov 04, 2008 1:13 am

LH2004 wrote:There is no 6% penalty as long as the excess contributions are removed by the due date of the return. Other than that, what you're describing is the right way to do this, except that there is no need to go to the trouble of opening a separate IRA and rolling over.


Yep, TA_Lurker's method should definitely work. My brother did this due to a legitimate mistake. Only difference in this case is we'd be doing it on purpose.

Also, there are two different penalties that often get mixed up. The 6% is in regards to excess contributions, which as you stated is not an issue because it is being removed before tax filing due date. The other penalty is 10% early withdrawal penalty on any earnings associated with the overcontribution if you are under 59.5. But again, in this case, because there is a loss (negative earnings), this doesn't apply.

For instance, if the account grew and you removed $5100 ($5000 original contribution and $100 earnings), and you are under 59.5, you do NOT have to pay the 6% penalty on the $5,000 because you removed it before tax filing deadline. But you have to pay 10% penalty on the $100 earnings. But again, this doesn't apply since our roths actually lost money.

Pretty confusing! But after pondering it a bit, I have to agree with LH2004. It absolutely can be done. TA_Lurker has a good idea though. For superstitious reasons, it might just "feel" better to do the other contribution at another custodian. I know it's not necessary, but it seems like the cleanest way to make sure the issue doesn't get mixed up.
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Postby statsguy » Tue Nov 04, 2008 1:30 am

I did not see this posted above (but admittedly did not read the whole thread)

Anyway check out
http://fairmark.com/forum/read.php?2,34028


Basically this question was asked (not by me...)
I was following a discussion over at Bogleheads:
http://www.bogleheads.org

where it was suggested that one withdraw his 2008 Roth contribution (which has subsequently shrunk to say $3K) and then recontribute the full $5K to the account.


And the answer was
This has always been possible and is nothing new, although the market losses have led to a "rediscovery" of the basic rules.


Follow the link for the whole story

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Postby LH2004 » Tue Nov 04, 2008 1:43 am

oneleaf wrote:Pretty confusing! But after pondering it a bit, I have to agree with LH2004. It absolutely can be done. TA_Lurker has a good idea though. For superstitious reasons, it might just "feel" better to do the other contribution at another custodian. I know it's not necessary, but it seems like the cleanest way to make sure the issue doesn't get mixed up.
Thinking about this a little bit more, I agree that it is not crazy to do it that way -- it avoids a technical argument that the custodian shouldn't let you do this. Since it's so easy to avoid that problem, I don't think the IRS would ever make that argument, so I still don't think it's worth the trouble, but it would arguably help a little.

(For those interested in the technicality: the contribution limits come up in two places, sec. 408(a)(1), which requires each IRA to enforce the contribution limit just for that account, and sec. 4973(f), which applies the same limits to multiple IRA's and imposes the 6% penalty on excess contributions not removed. The last sentence of sec. 4973(f) says that if you remove excess contributions, they're treated as if they were never made, but only for purposes of sec. 4973(f) itself -- the penalty on excess contributions to one or more accounts. I don't see anything that explicitly says a single IRA can take a replacement contribution because an earlier contribution was returned. A second IRA at the same custodian would work just as well as a separate custodian, though. Again, this is a very technical argument, and I wouldn't think the IRS would make it since, if it's right, it's pointless since it's so easy to work around it.)
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Postby a » Tue Nov 04, 2008 2:22 am

minesweep wrote:A couple of WSJ articles regarding recharacterization :

Do It Over

Changing Your Mind

Mike K
These are talking about something different and don't apply to "squeezing more into your" January '08 Roth contribution. However they are smart advice for anyone who did a Roth conversion in 2008.
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So I called the IRS today.........

Postby ualdriver » Tue Nov 04, 2008 1:36 pm

HueyLD wrote:
Easy Rhino wrote:I made my 08 Roth IRA contribution in January. Needless to say, every investment in the Roth has declined in value. Is there any way I can "undo" my january contribution, and instead turn it into a November-December contribution?


Yes. See quote from the IRS Pub 590 below.
If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.


I called our good friends at the IRS today and talked to someone who handles IRA questions: ID#7513529 but I forgot his name

I gave him the following scenario: In January of 2008 I contributed $5000 to my ROTH IRA for tax year 2008. In NOV 2008, I see that my JAN 2008 contribution is now only worth $3000. In NOV 2008 I execute a return of my JAN 2008 contribution. In DEC 2008 I make a $5000 contribution to my ROTH IRA for tax year 2008.

Q1. Is it legal to contribute $5000 to my ROTH IRA for tax year 2008 in DEC 2008 after there is a return of contributions of my JAN 2008 ROTH IRA contribution? (I also quoted HueyLD's quote from Pub 590)

A1. Yes, it is legal. Make sure you note it on form 8606 when you do your tax returns for tax year 2008.

Q2. Is there any way for me to deduct this $2000 example loss on my 2008 tax returns?

A2. Yes, but you would have to close all of your ROTH IRA accounts.

I know the IRS help line has provided "inconsistent" advice in its history, but this IRS help line person seems to think it's OK to do the above.

ualdriver
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Very interesting response

Postby cherijoh » Tue Nov 04, 2008 1:59 pm

The IRS response is very interesting. I guess if VG won't process a second contribution, you could open a Roth IRA somewhere else and then later transfer it to VG.

C
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Postby HueyLD » Tue Nov 04, 2008 3:03 pm

Hi ualdriver,

Great job calling our friend. I am pleased that you got correct answers from the IRS. The IRS typically gives good/correct answers even though the quality of their answers tends to deteriorate during the tax season due to the large number of seasonal employees.

Maybe somebody who is thinking about re-doing their 2008 contribution should contact Vanguard and set them straight.
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Postby tom0153 » Tue Nov 04, 2008 3:26 pm

minesweep wrote:A couple of WSJ articles regarding recharacterization :

Do It Over

Changing Your Mind

Mike K


Anyone hoping to accomplish the objectives of the OP should print this out, check with professionals in advance where indicated, and keep copies of the articles in your tax files.

I would also suggest obtaining clarification and confirmation over on Ed Slott's site.

Thanks for mining the info.

Best,
Best, Tom
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Postby TnGuy » Tue Nov 04, 2008 7:32 pm

From IRS publication 8606 instructions - tax year 2007: <----PDF file

See pgs. #4 "Return of IRA Contributions" and #6 "Part III - Distributions from Roth IRAs".

According to page #4 it appears like you can do what has been suggested here in this thread, but you will have to "attach a statement explaining the distribution".


Not so sure I want to get into having the IRS spend any extra time staring at and/or delving into my 1040 because of a red flag such as this. So I think I'll pass and go put my extra funds into after-tax.


David
"Money will not make you happy. And happy will not make you money." - Groucho Marx
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Postby tom0153 » Tue Nov 04, 2008 8:21 pm

TnGuy wrote:From IRS publication 8606 instructions - tax year 2007: <----PDF file

See pgs. #4 "Return of IRA Contributions" and #6 "Part III - Distributions from Roth IRAs".

According to page #4 it appears like you can do what has been suggested here in this thread, but you will have to "attach a statement explaining the distribution".


Not so sure I want to get into having the IRS spend any extra time staring at and/or delving into my 1040 because of a red flag such as this. So I think I'll pass and go put my extra funds into after-tax.


David


David, with the amount of "buzz" on this topic, I am guessing that this won't be much of a red flag. Once you have WSJ topics suggesting the move, and quoting Ed Slott and others, you have to figure there will be lots of such transactions. I have seen Slott recommending this to professionals.

You can visit his site, and his forum which uses the same BB software as this one (I posted a link way up above). You can ask about your flag concerns there. I'd check with your tax preparer too, to get an opinion there.

If you use TurboTax or similar, you can perhaps run your software immediately upon receipt (they are in the process of mailing, I think) to see how they will handle it.

Best,
Best, Tom
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Postby zeugmite » Tue Nov 04, 2008 9:23 pm

TnGuy wrote:From IRS publication 8606 instructions - tax year 2007: <----PDF file

See pgs. #4 "Return of IRA Contributions" and #6 "Part III - Distributions from Roth IRAs".

According to page #4 it appears like you can do what has been suggested here in this thread, but you will have to "attach a statement explaining the distribution".


Not so sure I want to get into having the IRS spend any extra time staring at and/or delving into my 1040 because of a red flag such as this. So I think I'll pass and go put my extra funds into after-tax.


David


Interesting. Return of contribution seems to be the cleanest route, because return of excess contribution does not seem to fly if you go by these "additional rules" found here (don't know where they got these from):
http://www.investopedia.com/articles/re ... 042804.asp

So this just hinges on whether you can get the custodian to take additional contributions after a return of contribution for whatever reason. Shouldn't be a problem if they do all the computations right... Yet, when I called them up, they said the same as Vanguard -- the amount you take out is a claim that it was "not supposed to be there", so you cannot make more contributions for that year. So indeed you may have to take it to another custodian.
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Postby Easy Rhino » Tue Nov 04, 2008 9:59 pm

I sent Wells Fargo CS an email:
My apologies in advance, this may be complicated:

How may I "undo" my 2008 Roth IRA contribution? I just opened the account (via transfer from Schwab) this year. I made the contribution in January at Schwab. I can, however, compute the amount of net losses I have had since the deposit was made.

My understanding is that since I deposited $5000 in January, my undo withdrawal would need to be about ~$3300 to account for losses since January. Would I then be able to pretend that the contribution never happened?

Here is the extra difficult part:

Later this year, I may want to "redo" a full Roth IRA contribution for 2008, of $5000. Will that be possible?


Their response, which was fairly agnostic, but appears to give me all the rope I want for myself:

Dear Mr. Rhino:

Thank you for your inquiry regarding processing a "Return of Excess" contribution from your Wells Fargo Investments brokerage Roth IRA account.

To initiate an IRA distribution, simply complete and return an "IRA Distribution Request" form. In your situation, under the section titled "Reason for Withdrawal" you would mark "Refund of Excess Contribution."

Please note: You should have cash available in your account prior to submitting the request. You can obtain the "IRA Distribution Request" form either by calling us anytime at 800.TRADERS (800.872.3377) or by printing it from our website. To print the form from our site:

1. From within your brokerage account, select "Brokerage Services"
2. Choose "Forms" from the submenu
3. Go to "Retirement Account Forms" and select "IRA Distribution Request"

Complete, sign and mail the original IRA Distribution Request form to:

Wells Fargo Investments
Attn: IRA Department - MAC N9311-13H
625 Marquette Ave, 13th Floor
Minneapolis, MN 55479

Or, if you prefer, please feel free to fax a signed copy of your completed IRA Distribution Request form to us at 612.336.7862. If withholding is desired, please indicate the percentage in the appropriate field. You should have cash available in your account prior to submitting the request.

Once your completed, signed request is received, your IRA distribution should be processed within approximately five business days.

As a self-directed brokerage customer, you have full investment control over the cash and securities in your account. We encourage you to speak to your tax advisor before proceeding. We cannot give you tax advise.

If you have any questions, or would like additional assistance with your account, please do not hesitate to call us anytime at 800.TRADERS (800.872.3377).

Thank you for your business and your continuing relationship with Wells Fargo Investments.
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Postby caklim00 » Tue Nov 04, 2008 11:44 pm

oneleaf wrote:How about recharacterizing it as a traditional IRA? That would allow you to take the $5K deduction on your taxes. Later on, you can convert any amount to Roth.
Is this possible? This seems easier and avoids the issue of having to sell funds for cash to withdraw, and then have to send in an extra $5000.
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