Correct Excess Contribution in Roth IRA Accounts
We realized last weekend after we were done with our income taxes that we, my wife and I, had made excess contributions in our Roth IRA accounts. Based on our income numbers, TurboTax said we were only eligible for $200 Roth IRA contributions in 2006, instead of the maximum $4,000 we made throughout the year. As a result, we will have to withdraw the excess contributions. Among the three options we have, we decided to make the money into a non-deductible traditional IRA as it appears to be the best choice. We can also choose to leave the fund in the account and keep paying 6% tax every year, or get the contributions plus any earnings back in cash, but neither gives us the maximum benefit of tax deferred growth of earnings.
The first step to fix the problem is to choose which fund to unload. For my wife’s account, the choice is quite obvious. She has more than $4,000 in American Century Equite Income Fund (TWEIX), the fund that will soon become a load fund. We never invested in a load fund and will never invest in such a fund, thus it’s an easy decision to sell TWEIX. In fact, I already sold all her TWEIX shares last week and she’s in the process of opening a traditional IRA account and transfer the proceeds to the new account. Part of my wife’s Roth IRA holdings are with Scottrade and the procedure of withdrawing excess Roth contribution at Scottrade is:
- Open a transitional account
- Complete a Roth distribution request
- Remove the excess contribution from the Roth account to the traditional account
As for me, the decision is not easy to make. After transferring most of my IRA assets from Scottrade to Vanguard, I only have one fund (BRSIX) at Scottrade, which has less than $4,000 market value. Besides, BRSIX is also the fund I want to keep. Thus, selling assets in Vanguard account becomes the only choice for me. I currently have four Vanguard funds in my Roth account:
- Vanguard Total International Stock Index (VGTSX)
- Vanguard Inflation-Protected Securities (VIPSX)
- Vanguard Total Stock Market Index (VTSMX)
- Vanguard Wellington (VWELX)
Though there are overlaps between VTSMX and VWELX, I really like VWELX a lot and since it now needs a minimum $10,000 (when I got in, it was $3,000), I think I will keep it for now. What I could do is to sell some of VTSMX shares, move the money to the traditional account, and buy VTSMX again. However, with this approach, I will have to pay $10 annual fee since the account will have less than $5,000 in asset by the time I make the withdrawal. To be cost-efficient, I think I will have to go with Vanguard funds (Vanguard charges hefty fees for non-Vanguard products), but which one to invest?
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