Add More Money Your Roth IRA – Undo and Redo Contributions After Losses?

So you listened to the financial experts and dutifully contributed $5,000 to your Roth IRA in early 2008. Unfortunately, stuff hit the fan and now you’re left with a lot less. Wouldn’t it be nice to be able to find some silver lining and shield another ~$1,000 plus earnings from taxes forever?

Well, here’s a slightly controversial idea that I ran across in this Boglehead Forum thread that might help you do just that. I think the easiest way to explain it is to continue with an imaginary scenario. Note that this leaves some variables in exchange for simplicity.

Example Scenario
Sometime in early 2008 you contributed $5,000 to your Roth IRA for the 2008 tax year. At the time, your IRA was worth $20,000 in total after the contribution. Now, in January 2009, the entire IRA is now worth $15,000.

You first “undo” your 2008 $5,000 contribution by following the same steps as someone who ended up being ineligible for a Roth IRA due to too much income*. Because your entire IRA account dropped by 25%, your $5,000 contribution is considered to have dropped by the same amount. You end up receiving a check for $3,750. You have received a return of your contribution, and have now technically contributed nothing to your 2008 Roth IRA.

Soon afterward, you simply open up a new IRA either at a new broker, or at your current broker if they are on the ball and have your 2008 total contributions as zero. (Otherwise they might throw a fit…) You can now throw in another $1,250 and contribute $5,000 again to your Roth IRA for the 2008 tax year before April 15th, 2009. Even if you just reinvest the $3,750 the same way as you did before, by using this strategy you have allowed another $1,250 to grow shielded from taxes, forever.

Is This Legal?
This is somewhat similar to the Traditional-to-Roth IRA reconversion method to save taxes. I read some skeptical posts in the BH thread as to the legitimacy of this action, but none were really backed by any evidence. I don’t see why both methods aren’t equally legal.

As another example, you might have made two separate $5,000 contributions by accident, and need to undo one of them. If everything is accounted for correctly by your IRA custodian, the IRS shouldn’t blink an eye. Here is another educated discussion in support of this idea. Other tax pros please add your thoughts in the comments below.

We ended up not being eligible for a Roth IRA this year, but if I was a candidate I think I would take advantage of this idea. In the long run, even stuffing another $1,000 in a Roth could save a lot of money in taxes.

* More information on correcting excess contributions in this Investopedia article. It must be done by the owner’s tax-filing deadline, which usually April 15, 2009 unless you file for an extension. Note that this is not the same as taking a distribution.


  1. I’ve never understood this. Is the $5k limitation per IRA account? or for all your aggregated IRAs accounts?

  2. This sounds like an interesting idea…I will have to research it further!

    Jansy–It should be per account. They could be at the same broker, just so they are different people. (E.g., I contributed $5k to my account, and $5k to my wife’s.)

  3. Jansy-Sorry, I might have misunderstood your question. If you have a standard IRA, and a Roth IRA, I believe you can contribute the maximum to each.

  4. To Jansy, no the limit is $5k total not per account.

    What you are saying sounds pretty smart but I wouldn’t try it. Sounds like you are asking for an audit. My sister is a CPA, I’ll ask and get back to you.

  5. Sorry I don’t quite understand this sentence: “Even if you just reinvest the $3,750 as you did before, you have still gained another $1,250 of tax-advantaged funds.” If you just reinvest the $3,750 and not add more money out of your pocket, you are back to what you had before. You don’t gain anything out of this move unless you add more money out of your pocket. Or did I miss anything?

  6. simplesimon says:

    It is probably a typo.

    I thought about this when the BH thread first started and now I’m thinking about it again. I’m thinking if I should overcontribute (i.e. open a Roth IRA at another fund company, would be Fidelity in my case) first, then call Vanguard and ask for my money back…or get the money back first by saying I overcontributed and then contribute to the second IRA after getting the money back (the latter involving a small lie obviously).

  7. Jansy – The limit applies to the total contributed across both IRAs. For example you could put $2,500 in a Traditional and $2,500 in a Roth if you wanted, but not $5,000 into each one.

    TFB – Mostly it’s just poor writing skills on my part. I meant let’s say you put back in $5,000 ($1,250 more than you got back) but don’t want to put it all in the stock market right away, you could just reinvest the $3,750 that was there previously. You are not changing your old investments. The other $1,250 you could contribute, and then invest later differently – cash temporarily or cash or dollar cost average or whatever.

    Just one way of separating the two out in my mind. Since it’s a contribution, you can even withdraw it without penalty in an extreme emergency.

    As long as the total 2008 contributions says “$5,000” to the forms given to the IRS, then I don’t see why it should cause an audit.

  8. This is a great idea. I don’t see any logical flaws with this “overcontribution” strategy.

  9. It sounds like a good idea to save some money. But is it ethical? Especially if you have to lie to get the ball rolling (get your money back from your original contribution). Seems a little shady, still might try it though.

  10. I don’t understand $3750 part.
    If I started contributing last year (2008) to Roth. and it dropped 50%. I can still withdraw all $2500 since IRA laid an egg and there’s no earning, just contribution.

    Like wise if I started in 2000 and if my IRA is left worth $10,000. I can withdraw it all since it’s still lower than all my contribution. All in all my entire contribution can be withdrawn penalty and tax free irrespective of gain or loss in Roth IRA

  11. Has anyone successfully done this yet?

  12. I think this is great idea as well. However, please know that the tax filing will be a little bit complicated, and confusing.

    In 2006, I accidentally did over contribute 10 shares of XXX worth $200 in my Roth. Max is $4000, and I put it $4200. A couple weeks later, I tried to withdraw the 10 shares of XXX, only worth $180 at that time, that I over contributed. When I did my taxes, I had to fill out the Form 8606. And somehow I still had to file $20 over contribution and pay 6% penalty on it. Please, correct me if I was wrong. Maybe I was not doing it correctly.

    So, if you plan to do this, just be careful and prepare of the tax filing confusion and explanation if you are filing with a tax preparer.

  13. thanks for the responses

  14. I’m sorry but I do not see it this way.

    If you would be able to reinvest $5,000 after “undoing” the 2008 contribution then yet you would reinvest the difference, say $1,250 as in your example. However, you already lost $1,250 in doing so.

  15. But the $1,250 you already lost will not magically come back either way…it is essentially a sunk cost. With this strategy you will not gain the $1,250 back, you will just essentially increase your 2008 contribution maximum by that much. For a young person, that can be a HUGE tax saving down the road.

    This actually works perfect for me as I was planning on opening a new Roth at Vanguard anyway. My original Roth I opened at E*Trade because I only had a few hundred to invest when I opened it and Vanguard’s minimums were too high. I can now invest $10,000 in a much lower-cost Roth at Vanguard ($5,000 for 2008 and $5,000 for 2009) and get my $5,000 minus about 40% (!) back from E*Trade as an excess contribution with no penalty!

  16. Ryan, Jonathan is not proposing you can “make money” by doing this, only that you can stuff more shares of a Mutual fund (dollars) if this is your goal.

    This helps you get your ROTH more full, but it costs you more cash up front.

  17. Can somebody spell that HUGE tax savings for me (even down the road)? I fail to see how this computes.

  18. Here is a related article about “recharacterizing” an 401(k) rollover from a Roth IRA to a normal IRA. It basically keeps you from paying the tax out of pocket on the full balance you rolled over. Then, since money was lost, you can convert the traditional IRA to a Roth IRA and pay the (now lower) taxes due.

    I think it’s a different goal than what Jonathan is talking about. My understanding is that his goal is just to get more money into a Roth IRA. In other words, if you contributed the max of $5k even though you wanted to put in more, his suggestion would give you the opportunity to add more money and still be a part of your 2008 tax year contributions.

  19. Back in ’05 so I started a Roth IRA with Primerica (what was I thinking) and I stopped contributing at the end of ’07 and started another one with Vanguard. The value of the Roth IRA after ’07 was approximately $2500. Now, it’s down to $1348. Can I withdraw(close the account) the $1348 amount in ’09 without any penalties and claim a loss? Thanks in advance.

  20. simplesimon says:


    The “huge” tax savings comes from having the $1,250 in a taxable account vs a Roth IRA. Taxable accounts have the drag of taxes (taxes on dividends, taxes on capital gains). If you left $1,250 in its own Roth IRA and it grew to $20k, vs if you had that same money in a taxable account (first of all wouldn’t be $20k cuz of reinvested dividends being taxed, but let’s say it is in this case), but upon withdrawal, you would owe:

    [capital gains tax] * ($20k-$1.25k)

    You can play with return assumptions and see how much this “extra” money can grow to.

    I understand what you’re saying about the bottom line at the moment, it doesn’t change. There is a loss of $1,250 no matter what. But you’re essentially putting more money into a Roth, which is a good thing.

  21. Ryan – the HUGE tax savings is the $1250 that will grow and be withdrawn tax free instead of at whatever the current and future rates are (assuming it was invested in a taxable account instead of a Roth)… that can save a nice bit of money.

  22. Jonathan,

    I’m in the same boat and haven’t been able to contribute to a ROTH.

    That said, even though I maxed out my solo 401K contributions, I’ve made “non-deductible” traditional IRA contributions that should be eligible to be converted to a ROTH in 2010 when the income restriction goes away…

    I’ve been doing this for a few years, so in 2010, I should just be able to make one giant traditional IRA to ROTH IRA conversion without any tax consequences because I already paid tax on the traditional IRA contributions each year. (Any gains of course, would be taxed in the conversion, but with the market as it is, I’m guessing there won’t be any.)

    Something you might want to look into as it sounds like we are in the exact same situation.

  23. That is an informational and interesting post. People just have to be very careful not to make a mistake, or they can have a nice little bill at the end of the year. Honestly I never would have even know about this. Thanks again.


  24. Hmm,

    Does anyone know if the negative gains when withdrawing the IRA contirbutions are deductible as well. I know when you withdraw contirbutions and the gains are positive you must report the extra income as taxable income… But if the gain is really a loss, are we allowed to report the negative income.

    IE, the line in Pub 590 that talks about this is:
    “If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.”

  25. How would you determine how much you should take out – or would the brokerage do that for you? For instance, I contributed $5K to a Roth IRA in January 2008, but I put it in 3 or 4 different funds which have had different returns (declines). Do I have to figure out by how much my contribution actually grew (shrank), separate from the other funds in the IRA? That would be very complicated math, especially if you were buying and trading stocks within your account all year…

  26. @Jonathan – Thank you for clarifying it. I equated “reinvest” with “re-contribute.”

  27. There’s a simpler method, which is to recharacterize your contribution, and then convert. It worked like this:

    1. I put 5000 in my Roth IRA in January 2008
    2. I got hammered, like everybody else.
    3. In December 2008, I had my Roth contribution “recharacterized” as a traditional IRA contribution.
    4. Now I had to wait 30 days into the next calendar year.
    5. Today I “converted” that traditional IRA into a Roth IRA for 2009. I also contributed an additional 5000 for my 2009 Roth.

    Nicely, I get the tax deduction on the traditional IRA in 2008, which I used to pay off the conversion of a Rollover IRA I had from a previous employer. I will have to pay taxes on the conversion in 2009, however, but I could have also withheld the taxes in shares. I chose not to do this, so I could keep them in the Roth.

  28. Maury – Yes, we did non-deductible IRA contributions for 2007 tax year, and will do it for 2008 as well. It turns out that putting it off saved us some money this year…

    Artie – If I recall correctly, you can deduct losses on a Roth IRA only if you completely liquidate *all* your Roth IRAs and if the losses are more than 2% of your adjusted gross income (AGI). I’d double check this.

    Meg – Your broker should do all the math for you.

    MikeB – How does your method allow you to contribute additional money into your Roth IRA though? I think you are talking about a different situation.

  29. You’re right — it doesn’t allow for additional contribution, but it also is 1) simpler with many of the same tax advantages (e.g., two short phone calls) and 2) isn’t as likely to draw unwanted IRS attention. I think your analysis is right, but I’m nervous about taking money out and refunding (perhaps unnecessarily).

  30. Maury – The money you’ve been contributed to your non-deductible IRA won’t be taxed (because you have already been taxed) when you convert to ROTH IRA in 2010. However, you’ll still have to pay tax for any gains.

    Hope someone can help me out with this:

    In early 2008, I contributed $5k to my deductible IRA account. But, I won’t be able to deduct it because my income is over the required. I need to re-characterize, transferring the $5k from my deductible IRA to ROTH IRA.

    1) The $5K is now reduced to $3k. Should I ask Vanguard to transfer the $3k to the ROTH account? or Will they do the calculation for me?

    2) Will Vanguard charge a fee for re-characterization?

  31. Thanks for bringing up this topic. I can certainly see why this topic is “controversial” and I encourage all to avoid the “strategy,” for two main reasons.

    First, I believe withdrawals of your contributions are treated differently than excess withdrawals. I’m not a tax expert, but from what I’ve read, I understand when you withdraw money from your IRA, the first money out is treated, dollar-per-dollar as your contributions. I.e., I don’t think withdrawals of your contributions are calculated to include your gain or loss (as is the case for excess withdrawals).

    Second, you instruct your IRA broker to designate the excess contribution amount. Will you not be accountable for falsely stating the excess contribution amount? You can certainly withdraw your regular contributions, but to withdraw under the excess contributions calculation method, I think you actually need to be withdrawing it for the reason of excess contribution.

    Again, I am not a tax expert – I’m just relaying what I understand from what I’ve read on the topic. I believe the IRS will hold an individual accountable for inaccurately stating the “excess contribution” amount. However, I do not know what they can/will do to you if you do it. I strongly encourage everyone to accurately report your excess contributions and to research for yourself on the correct method to withdraw your contributions.

    It would be great if we can withdraw our regular contributions, receive a tax deduction for the capital losses, and then recontribute for the same tax year. However, I highly doubt this is an accurate process.

    If anyone finds information otherwise, please share this with all of us.


  32. Putting your maximum contributions every year will result in significantly less tax liability and more money for retirement! Consider a self-directed roth ira for real estate and review your options for these types of plans after talking with a financial advisor since real estate prices are at historic lows right now.

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