I over-contributed $2000 to a ROTH IRA in 2006 and $2500 in 2007 . According to what I have read, I can rollover the 2007 excess contribution to a Traditional IRA , which I currently do not have. Can I do the same for the 2006 excess contributions, or do I owe the
6% penalty, i.e $240 ( for two years ) plus the 10% early withdrawl penalty?
I'm going to assume that these are excess contributions because your income was too high, not because you exceeded the overall IRA contribution limit. If I'm wrong, ignore the rest of this post and clarify.
Yes, you can "recharacterize" your 2007 contribution and the earnings on it as a traditional IRA contribution. Contact your IRA custodian for the procedure. Remember that you will report this as a traditional IRA contribution on your 2007 return, either as an adjustment to income or as a nondeductible contribution on Form 8606. See IRS Publication 590.
You definitely owe the 6% penalty for 2006. If you didn't pay it when you filed your 2006 return, file a 2006 Form 5329 by itself.
I don't see any way around withdrawing the 2006 excess contribution. You can leave the earnings alone. As long as you withdraw the 2006 excess by the due date of your 2007 return there will be no further penalty. There won't be any tax due either, assuming you've never taken a distribution from your Roth. Report this on your 2007 Form 8606.
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