What do you do if you contributed to a mutual fund under a Roth IRA but find your income exceeded Roth lmts?

Transfer it to a regular IRA, adjusting for gain or loss on the money. This happened to me the second year or so and it was a huge pain because I traded in a lot of mutual funds and a few stocks. I calculated percentage return for the part of the year that I had the "illegal" money in the Roth, then added that percentage to the "illegal" money and transferred out that amount.
So assuming I had $3,000 in the account to start, contributed $3,000 illegally, and had a 10% gain after that date, I did this calculation:

3,000 + (50% x 6,000 x 10%)

In this example you'd transfer $3,300. Obviously in real life you won't have such even numbers.

I explained all this on an attachment and the IRS didn't question it.

Good luck,
Houyhnhnm

If you converted your traditional IRA to a Roth IRA, but were not eligible to do so, unless you recharacterize the amount you converted, your conversion will be treated as a taxable distribution from your traditional IRA that may be subject to additional tax, and will be treated as a regular contribution to your Roth IRA that may be subject to an excise tax if it is an excess contribution.

You may decide to recharacterize your Roth IRA conversion by transferring in a trustee鈥搕o鈥搕rustee transfer, the amount you converted (including net income allocable to that amount) back to a traditional IRA. You may do this prior to the due date, including extensions, for filing your tax return. Show the conversion on Form 8606. Refer to the Form 8606 Instructions for information on reporting recharacterizations.

For information on Roth IRA distributions, refer to Topic 428. For information regarding Roth IRAs, refer to Publication 590, Individual Retirement Arrangements.

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