scheme to increase Roth IRA contribution for 2008

Any time you withdraw an annual contribution before the due date of your return, it is automatically considered a return of an excess contribution. This means it is treated as if it had never happened as long as you withdraw the earnings, which could be negative. As such, you never made an annual contribution and you are therefore free to make an annual contribution to a Roth or traditional IRA or combination of both before the due date of your tax return.

Effectively, you contributed $8K that lost $2k leaving a net amount of $6K in the Roth until you lose some more if you put in equities and the market continues its free fall.

Thanks. So you're saying this scheme IS legit ?

I guess the key thing is, what do I say to the custodian ? You're saying I should ask for a "return of excess contrib" ? That sounds kinda weird, since I haven't made an excess contrib. Unless I go ahead and put $6000 MORE in, and THEN say "whoops, I've contributed $12000 to my Roth, please return the excess" and somehow they send me back $4000 instead of $6000.

You ask for a return of your annual contribution with the earnings. Once you have your contribution back, you are free to do what you want.

Ay, there's the rub. Pub 590 spells out the rules for a conversion, recharacterization, and reconversion (the later of the tax year following the conversion or 30 days). But there is no indication one way or another if the same waiting period applies to contributions, "un-"contributions, and re-contributions.

Fortunately, there is a relatively low dollar cap on annual contributions, unlike conversions.

Another twist, which also shows up in conversions, is this: what if your first contribution was made into Security A and Security B, and since then A has gone up in value and B has gone down. Can you freely cherry pick and only ask for the withdrawal of the contribution that was used to purchase B, so that you can re-invest that one while leaving winner A alone? If you segregated your contributions by asset purchased, that might help.

Yes, the 1099-R's you get may prove interesting, especially since a withdrawal of a current-year contribution by the due date of the return still needs to be reported on Form 1040. There's that pesky distribution code 8 (or P) to deal with...

-Mark Bole

This means, I take it, you get back your 6,000 plus no earnings, so right back where you started from. Then if you're feeling lucky..... !

ChEAr$, Harlan Lunsford, EA n LA

But any contributions are immediately co mingled, so it doesn't matter what actual securities were purchased with the funds. Not even reasonable for the custodian to have to keep track.

ChEAr$, Harlan

When you ask for a return of your contribution in this example, you only get back $4000 as the earnings were negative. If you decide to make a contribution of $6000 to another Roth IRA, then at that point in time, you have a Roth with $6000 and a paper loss of $2000 that is not recognizable for tax purposes.

Not necessarily, you might have multiple custodians, or even with a single custodian, IRA investments are often kept in separate accounts (Fidelity and T. Rowe Price are two such custodians I know of who do this for mutual fund investments).

Again, this is all spelled out pretty clearly when it comes to recharacterizing a conversion to a Roth, but not so when we are talking about an original contribution. It makes sense to recharacterize a Roth conversion in a market downturn, but it is limited to once per tax year.

Where does it all end? Do you withdraw your contribution (including negative earnings) now, immediately re-invest it plus an additional ante, and then do it again next April if the market has continued to go down?

-Mark Bole

I know of nothing in the rules that limits the number of times you can make a contribution and then withdraw an excess contribution. As long as it all takes place before the filing deadline, each contribution & its subsequent withdrawal is treated as if it never happened. What we use to call on the streets of New York.. a do-over.

Alan wrote: [...]

Not according to the "new method" established in TD 9056 (based on Notice 2000-39):

Net Income = Contribution x (Adjusted Closing Balance - Adjusted Opening Balance) / Adjusted Opening Balance.

Net income can be negative under this method. Worksheets 1-3 and 1-4 in Pub 590 illustrate this calculation for withdrawing Trad. IRA contributions or recharacterizing a conversion.

It's a realized loss, isn't it? If this were your entire Roth IRA investment, you would actually be able to include the loss as a miscellaneous 2%-AGI deduction on schedule A (but only if you didn't turn around and re-contribute, thus making your year-end balance greater than zero).

It might be tricky to get the custodian to recognize this as un-doing a contribution, rather than a normal non-taxable distribution of a regular contribution, which is always allowed with a Roth IRA using the ordering rules for distributions. I'm still wondering, what distribution code would you expect to see on the 1099-R?

I still don't see any real benefit to this "scheme", as the OP referred to it. Unlike recharacterizing a conversion, there is no immediate tax savings. Why not just take the extra $2K and invest in an ordinary (non-retirement) account?

-Mark Bole

I think the point is: if you have another $2000 to invest, why not put it in a Roth and have it grow tax-free and later distribute it tax-free.

I would code it J8.

EXACTLY. Sorry if I did not make that clear. Also, I am NOT trying to get a capital loss (believe me, I've already "harvested" enough capital losses to avoid any capital-gains taxes for some years to come :(

Thanks, Sorry, but after reading all the responses (which I DO appreciate, I am no closer to knowing if this plan is legal/possible than I was before. I did call my broker, and was absolutely unable to convince the moron of what I was trying to do; all he could do was say "if you ask for a return of this year's contributions, we'll send you $6000."

It is.

That's why their fine print says "We don't know bupkes about taxes."

Request a return of your 2008 contribution and earnings as calculated by the custodian. You'll also have to tell them what to sell if there isn't enough cash.

I appreciate your unease, but if you've read Pub 590 it should have gone away. If it didn't and you want someone you can blame legally if your plan goes awry and costs you money in the form of tax penalties, hire someone to give you a written opinion.

That would be incorrect, and would spoil your plan. To meet the requirements, earnings (even if negative) must be included in the return of contribution.

And as I mentioned earlier, for purposes of determining the earnings, you cannot cherry pick just the investments that lost the most money, unless you carefully kept the contribution segregated from other Roth investments.

I wouldn't go that far! ;-) The "normal" scenario as described in the Pub is a withdrawal from a Roth of *excess* contributions, which this is not. Then, he's going further outside the box by re-contributing for a second time in the same year -- all legal, but not routine. Be prepared to file a substitute 1099-R if your custodian doesn't get it right, and to include an explanation with your return in any case.

Bottom line? On the plus side, this is simply a market timing exercise with no guarantee of any tax benefit. You might as well wait until next April to see if the market has gone back up (don't try to make the second contribution before withdrawing the first one, since returns of contributions are done LIFO). On the minus side, you've already had a taste of the potential cost and hassle of trying to get the paperwork properly filed and accepted.

-Mark Bole

And how would that be any differnt from fine print saying, "We know bupkes about taxes?" :^)

Obviously, but thanks for the reminder.

Oh no. But I still have to decide which ones to sell, if I don't have the earnings-adjusted $6000 sitting in cash (which I don't). Which I think kinda turns me off about the whole thing - having to keep the money out of the market for the time it takes to make all this happen.

I don't get that. How is putting approximately $2000 additional investment dollars into my Roth not a tax benefit ? Are you referring to my concern that I might get screwed by having the money out of the market for awhile ?

John

Because there is no immediate tax benefit from contributing to a Roth -- in contrast to the process of recharacterizing a Roth conversion (do-over), where there *is* an immediate refund of tax paid.

Whether money in a Roth has an overall *financial* benefit (includes earnings and tax effects) compared to money left outside, over your given time line, is a subject for a financial planning discussion.

I could turn the question around and ask, how was putting in the first $6K this year a tax benefit? You don't even have the option of using the $2K capital loss, unless you close out your entire Roth. My point is that contributing the max to a Roth is not always an unconditional good thing.

That's a big one, yes. If the rules allowed you to simply "top up" your Roth IRA balance by sending in additional cash, none of this would be a big deal. It's not so much the contribution to the Roth that I question, but whether the marginal benefit outweighs the hassles of getting the custodian and the IRS to do the right thing.

If you follow through on this, please post the results. Maybe the

-Mark Bole

I must have missed something along the line. Can you point me to a cite for so called "negative earnings" having to be considered in the calculation?

ChEAr$, Harlan Lunsford, EA n LA

Yes. I embedded this in a post several generations back, here it is again. There was an "old method" (based on beginning of tax year and no negative earnings) which was phased out a few years back, best I can tell.

-Mark Bole