Fixing excess IRA contribution

Dear Bill,
In order to contribute to a Roth IRA, your modified annual gross income, or MAGI, has to be under a certain threshold. In 2006, the Roth IRA contribution is reduced if your MAGI is in excess of $150,000 for a married couple and not allowed when your MAGI exceeds $160,000. For single taxpayers the limits are $95,000 and $110,000, respectively.

If you make contributions you are not entitled to make, you have until the due date, including extensions, to withdraw the excess contributions. If you fail to withdraw the funds, an excise tax penalty of 6 percent is due on the contribution for each year the ineligible contribution remains in the account. Since you failed to withdraw the funds and did not take an extension, you would normally owe the 6 percent penalty for 2006. However, under special relief provisions of Regs. Sec 301-9100-2, you have until Oct. 15, 2007, to correct the excess contribution.

To correct the contribution, you can ask that the excess contribution be applied to 2007 or withdraw the funds and report any income on the funds in 2007. You cannot redesignate the contribution as a deductible IRA for 2006 as the due date has passed. File Form 1040X with IRS explaining that you withdrew the excess contribution to a Roth IRA for 2006. On top of Form 1040X write in "Filed pursuant to Regs. Sec 301-9100-2." See Form 5329 line 23 instructions for more information.