ROTH IRA laws change in 2006?

Factual Questions
1

Last year I contributed the maximum amount (4000 dollars) to a Roth IRA. Or at least I thought this was the allowed amount.

TurboTax is telling me that I have contributed 4000 too much. Did the laws change or is this a bug in TurboTax?

2

If you’re single did you make more than $110,000 last year?

Married filing jointly more than $160,000?

3

Did you earn at least $4000 in 2006? I doubt if TurboTax has a bug in something as simple as this. You might have entered something wrong.

4

Hmmmm. I hadn’t thought of that. Normally the answer would be no, but I had a large buy out from a company that laid me off, so now I’ll have to check totals.

Thanks, I’m sure you have spotted the problem for me.

5

This is a hijack, but: Roth IRA is after tax money, right? Why does TurboTax care how much you contributed?

6

A: There is a limit to what you can contribute and
B: As Doug Bowe pointed out, the limit goes down if you exceed a certain income level.

7

Guidelines for Roth IRA contributions direct from the IRS.

8

C: You can earn a Saver’s Credit for contributing to a retirement plan, deductible or not. The income limits are rather low though, $50k MFJ, $37.5k HOH, $25k otherwise.

9

irs 590 for the IRS guidelines for reduced contribution limits… or you may not be eligible if your income is too high.

Also, if you also contributed to a traditional IRA that could be it. The max limit is $4000 (before AGI consideration) for someone under 50 for both the roth and trad IRA combined (cannot do $4k in each for 8k total).

10

There are a couple of websites that talk about what you can do with that excess - look down to #8 on [url=http://www.fivecentnickel.com/2006/11/08/undoing-roth-ira-contribution-mistakes/][this site[/url. Basically you have to withdraw that 4K plus any income attributable to it. You can, if you wish, recharacterize it to a traditional IRA vs. a simple withdrawal. Probably nondeductible if your job had any retirement plan at all, but at least your income would grow tax-deferred.

One thing on that site which peeves me is: if you simply withdraw (vs. recharacterize), apparently they treat the earnings as subject to tax and penalty. So if your 4K is now worth 4100, you’d have a 10% penalty, plus income tax, on the 100 dollars (the 4K is not an issue). It appears that recharacterizing the 4100, rather than withdrawing it, would avoid that issue.

Another site with similar info: http://www.complianceheadquarters.com/IRA/IRA_Articles/1_30_07.html

Usual disclaimer: IANAA.