Excess IRA contribution

Withdraw the excess before you file your tax return

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-----> real address on hobokeni or hobokenx

Exactly what made the $200 excess? It affects his options.

He deposited what he made from his summer job ($3050) but when his W-2 arrived, Box 1 was $193 less because of contributions to a 401(k). He forgot that that amount was non-taxable and shouldn't have been counted as earnings when figuring how much he could contribute to his Roth.

If he removes the excess before Apr. 15, does that avoid the penalty but still subject him to taxes on the earnings on that $193?

Thanks for the clarification, and congratulations on raising such a sensible, forward-looking son. Here are his options:

1. Withdraw the 3 and the earnings on it by the due date of his 2007 return. The earnings will be 2007 income even though paid out in 2008. Because of his standard deduction, it's likely that he still will pay no income tax for 2007. The earnings would be subject to a 10% premature distribution penalty. Unless he's a brilliant stock picker, it's likely that the penalty will be negligible. (BUT, see below.)
2. Assuming he anticipates at least 3 of earned income in 2008, he can do nothing. He would owe a penalty even though he still pays no income tax. He then reduces his allowable 2008 contribution by 3. No notice to or action by the Roth custodian is necessary.

On the surface it looks like withdrawal is the obvious choice. Before doing so, find out the amount of any fee the custodian would charge. If that fee is more than $12, he's better off with option 2.

Thanks, Phil. I think he'll choose option 1. Vanguard doesn't charge a fee for the transaction.

Appreciate your help!

Phil, I hope you won't mind a follow up on this situation . I'd like to clarify something now that my son has withdrawn the excess.

He withdrew the $193 but there were no earnings, instead there was a loss of $16.26. So Vanguard has reported his excess distribution as $176.74. He asked them to put this amount toward his 2008 contribution. He will not owe the 6% penalty since he withdrew the excess before April 15, and he won't have a 10% premature distribution penalty on the earnings since there weren't any, correct? And his 2007 IRA contribution is considered to be $3050 (wages) less $193 (excess contribution), for a total of $2857, is that right?

Many thanks for your help!

Correct.