Filing Taxes for the First Time: Roth IRA Question

March 3, 2013 8:14 PM

Hi HiveMind, I'm filing my own taxes for the first time as a recent college graduate (using TurboTax -- so easy!) and I have a question with regards to my Roth IRA account. In 2012, I graduated college and started a business. We didn't open for business until late November and I only paid myself $1,250 for all my work in 2012. I also opened a Roth IRA account and contributed $5,000 for the year. However, according to TurboTax, contributions to an IRA account cannot exceed earned income. My question: can I simply report a $1,250 contribution to the IRA on my taxes and leave the $5,000 in the IRA? Will this get me in trouble? Should I merely take out the $3,750 and invest it in a different account? If noticed, could I just plead ignorance as my first time filing? Thanks!
posted by masters2010 to Work & Money (5 answers total)

If you're going to break the law you probably need the advice of a CPA.

If I recall correctly you have until April 15 to withdraw your excess contribution to the IRA from last year with no additional penalty.
posted by infinitewindow at 8:21 PM on March 3, 2013 [1 favorite]

If you leave it in you will owe 6% in taxes on the excess for as long as it stays in the IRA.

You have until April 15 this year to take it out. Just take it out. You could then put it in a 2013 IRA if you wanted (and if you have the earned income for it this year).
posted by payoto at 8:22 PM on March 3, 2013

You need to fix the contribution--people accidentally overcontribute to Roths all the time, contact your brokerage and they can walk you through how to fix it, but do it sooner rather than later as I believe there's a deadline for fixing it. (It can be a little more complex than just taking the money out, since if it earned anything you have to take out the earnings on the excess contribution too.) Roth IRA contributions aren't reported on your 1040 so you can't "report a $1,250 contribution to the IRA on [your] taxes". TurboTax just asks you about a Roth because it's trying to be helpful but that info doesn't go on your return. Also your brokerage sends the IRS info on what you contributed to your Roth on form 5498, so the IRS will have all the information it needs to know you made a disallowed contribution.
posted by phoenixy at 8:28 PM on March 3, 2013

You can file later to correct the overcontribution, but there's a penalty based on how far over you went, which you pay interest on every year you fail to correct the problem. But fortunately if you just contribute less than the maximum in the following years you will only pay that penalty until the overcontribution evens out. Pretty reasonable, really.
posted by en forme de poire at 9:09 PM on March 3, 2013

Response by poster: Sounds like the answer is clear...I'll call the broker tomorrow. Thanks!
posted by masters2010 at 9:37 PM on March 3, 2013