Roth IRA Question (USA Specific)

[Frank the Yank]

To my fellow Americans...

A Roth IRA allows you put tax-paid income into a retirement fund which you can then withdraw after a certain age with no tax penalty.  Good.

But, it also has income restrictions - over ~US$100K/yr you are not allowed to put money into a Roth IRA.

My Question:  How does the IRS know?  Do they check?  I've been putting money into a Roth IRA for years, but my income exceeeded that amount several years ago.  No one has come to me about it.
Should I just keep doing it?

Of course I file my taxes annually, pay federal income tax, etc.

Thanks for any guidance.

[Vulcanl]

Frank,

I believe that starting this year that USD 100K limit has been lifted for rollovers (from a 401K or regular IRA)...I have a lot of stuff on this at home, will provide links here later this evening.

Roth IRA investing is very tricky for expats.  In my own situation over the years I have generally not been allowed due to IRS rules.

Re: this question "Should I just keep doing it?"

I would say NO.  I wouldn't mess with these people.  The IRS is getting ever more sophisticated in picking up stuff like this.

As mentioned, I will follow up later this evening...

[Frank the Yank]

Thanks V.  I am aware of the 2010 window to convert a regular IRA to a Roth.  But, the only IRA I have is a Roth.  When I created it years ago my income was within the limit.  I've just had a monthly auto contribution each month.

Complicated.

[Vulcanl]

Frank,

This will be of help:

http://www.overseastaxservices.com/index.php?option=com_content&view=article&id=59&Itemid=59

[Vulcanl]

Frank,

Check this out as well:

http://www.irs.gov/faqs/faq/0,,id=199696,00.html

Indeed the IRS website does a good job of providing answers, it's just there is so much there it takes a while to get what you need

[Frank the Yank]

Vulcan, thanks!  The first link in particular was very useful, and in fact that whole site appears rather useful.

For anyone with this same question, the answer is here, from V's first link:

What happens if I made one or more IRA contributions that I wasn't entitled to make?

A contribution you made in violation of the above rules is called an “excess contribution.” A 6% excise tax applies when excess contributions are made to traditional or Roth IRAs. This tax is applied for each year that the contribution remains in the account.

Example: In 2007 and 2008 you incorrectly contributed $3000 per year to your Roth IRA. You will owe $180 tax for each year that each contribution remains in the account. It should have been paid with your tax return each year, but if that didn't happen you can file Form 5329 on its own (without amending your full tax return) for each prior year necessary. In this scenario, if you discovered your mistake (but did not correct it) in 2009, you would owe $180 for 2007, $360 for 2008, and another $360 for 2009.

How do I correct my excess contributions?

There are four ways to correct an excess contribution. Which one to use will depend on such issues as how long ago the contribution was made, whether you expect to be eligible to make a contribution in the near future, and so forth. The options are these:

1.Withdraw the excess contribution plus any earnings (or minus any loss) by the due date (including extensions) for the tax return of the year the excess contribution was made. This avoids the 6% excise tax altogether. However, any income earned on the contribution must be included in income in the year the excess contribution was made, and may be taxed as a premature distribution.
2.Withdraw the excess contribution after the due date (including extensions) for filing the tax return. This stops the 6% tax beginning with the year of the withdrawal. In this case, any earnings on the contribution remain in the account.
3.Carry forward the excess contribution to a future year. If you expect to be eligible to contribute in the next year, for example, the excess contribution from a previous year can be applied as a contribution for the year you become eligible. (You will continue paying the 6% tax until the year you are eligible to apply the amount as a legitimate contribution.)
4.Distribute funds from the IRA. Prior year excess contributions are reduced to the extent that distributions are made from the account. (But if you aren't eligible for normal distributions, there may be early-withdrawal taxes to pay.)
All of these actions can have tax ramifications. It is necessary to look at the full picture of your situation to determine which correction will be best in your particular circumstances.