I contributed to a Roth in 2000, but now I find I made too much money to qualify. Therefore, I should withdraw that money. However, since I want to contribute for 2001, is there a way I can do this without shuffling money out and back in again?

-- Jim Coyle

Jim,

Unfortunately, your 2000 contribution has to come out of the Roth IRA or you will be hit with overpayment penalties. But if you pull the money out and put it right back in a Roth IRA, you will owe a 10% early withdrawal penalty, in addition to any tax on earnings, because you are taking the money out of the account before you are age 59 1/2 and the account is five years old. Even so, because you can withdraw earnings from a Roth IRA tax-free in retirement, it may be worth it to pay those penalties now, especially if you are still young and have many years left for your money to grow.

Here's why.

As a reminder, you can contribute to a Roth IRA in 2000 if your adjusted gross income is below $95,000 as a single person (contributions are phased out up to $110,000) or $150,000 if you're married (contributions are phased out up to $160,000). If you're married and filing separately, contributions are phased out between zero and $10,000.

But what happens if after you get all your W-2s and 1099s, you realize you made too much money to contribute?

You have to get the money out of the account or you will be hit with overpayment penalties.

The obvious answer is to recharacterize the amount out to a nondeductible IRA. That means your contributions are in after-tax dollars. You then will owe ordinary income tax on any earnings your contribution generated. Report those earnings on line 16 of your

Form 1040

-- U.S. Individual Tax Return

, reminds Martin Nissenbaum, director of income tax planning at

Ernst & Young

.

While I know you would like to just withdraw the money and put it back into a Roth for 2001, you can't do this without incurring penalties, says

Fidelity

.

Not only will you owe tax on any earnings generated, you also will owe a 10% early withdrawal penalty on that money because you pulled it out before the account was five years old and you are 59 1/2, says Nissenbaum.

But here's something to think about. If you are an active participant in a 401(k) plan at work and you keep up this income stream, you will never be able to make

deductible

contributions to an IRA. We

covered the details last week, but as a refresher, if you are single and your adjusted gross income is more than $42,000, you cannot deduct your IRA contribution in 2000. As a married person filing jointly, if your adjusted gross income is more than $62,000, you do not get a deduction. In either case, you already earn too much.

Sure, you can contribute to a nondeductible IRA regardless of how much money you make, but you will owe tax on any earnings the account generates over the years when you withdraw in retirement.

Granted, contributions to the Roth are not deductible either, but you can withdraw contributions and earnings from the Roth in retirement totally tax-free.

So it may be worth it to pay the tax and penalties now to get the money back into the Roth IRA and guarantee yourself the ability to withdraw the money completely tax-free in retirement, says Maggie Doedtman, manager of tax training at

H&R Block

in Kansas City, Mo.

Your best alternative, though, is probably converting the contribution to a nondeductible IRA and scraping up another $2,000 for your 2001 Roth IRA contribution. (Of course, we're assuming that you will not exceed the income limitations in 2001. If you do, you will be back in the same boat this time next year.)

A final note: If you made a contribution to a Roth IRA in 2001 for the 2000 tax year and now realize you are over the adjusted gross income contribution limits for 2000, you can easily call your Roth IRA custodian and let him know that you made a mistake and would like to make the account a 2001 Roth, according to

Fidelity

.

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