Transcripts

"Kevin McCormally's Tax Tips"-Roth IRA

SUSIE GHARIB: As we mentioned earlier, there's just one week to go now until the Federal income tax filing deadline. So, every night this week, we'll bring you another last minute tax tip that can help make it easier to file. Tonight, fixing a Roth IRA SNAFU. Here's our tax expert, Kevin McCormally, editorial director of "Kiplinger's Personal Finance."

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": I've heard from a surprising number of NIGHTLY BUSINESS REPORT viewers who make too much money. Too much, that is, to contribute to a Roth IRA. Unfortunately, they made this discovery after they made the contribution. Now what do they do? You can't make a 2006 Roth contribution if your 2006 income was over $110,000 if you file a single return or over $160,000 on a joint return. The trick is that savvy investors know that the earlier in the year they stash their cash in an IRA, the sooner the earnings are tax free. But you're never certain about your income until the end of the year.

That's the pickle these viewers find themselves in. There are a couple of ways to solve the problem. You can simply ask your IRA sponsor to give you your money back. As long as it's out of the Roth before you file your 2006 return, you'll avoid the 6 percent excess contribution penalty. Now, the sponsor also has to figure out how much the contribution has earned so far and send that money to you, too. You have to report and pay tax on the earnings on your 2006 return. And you'll owe a 10 percent penalty if you're under age 59 1/2.

The other solution is to have the IRA sponsor move your Roth contribution and its earnings to a traditional IRA. Do this by April 17 and the law treats it as though your money went into the regular IRA in the first place. There's no income limit for contributing to a traditional IRA but, if you also have a retirement plan at work, you won't be allowed to deduct your deposit. Whichever method you choose, get that extra money out of the Roth by April 17 to avoid that 6 percent penalty. I'm Kevin McCormally.

KANGAS: You can submit your tax questions to Kevin McCormally and learn more about the stories in tonight's broadcast on our website. Go to NIGHTLY BUSINESS REPORT on pbs.org. Look for the tax tips logo on our home page. You can also e-mail us at nbr@pbs.org.