"David Hunt" <dhunt[at]cisco.com> wrote:

- quote -

FYI, Vanguard doesn't charge the penalty, the IRS does.
They WITHHELD 10%, and your only recourse is to claim it on
next years return as additional withholding. It wasn't that
her taxable income was zero that she couldn't contribute, it
was because amounts excluded from income because of the
foreign income exclusion do not qualify as earned income for
purposes of an IRA. If she had earned income from other
sources she could contribute based on that.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Boston, MA 02109

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dhunt[at]cisco.com (David Hunt) writes:

- quote -

She fixes it by withdrawing the excess contribution.

You're confused about what Vanguard did. They evidently
withheld 10% for income tax, but that doesn't mean that she
owes a penalty. (She could have asked to have no
withholding, but that train has left the station.)

As long as the excess contribution is withdrawn before the
extended due date of the return, the 10% early distribution
penalty applies to only earnings withdrawn. See page 45 of
Publication 590.

Phil Marti
Topeka, KS

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For 2003/2004 my girlfriend contributed $3k each period.
Because of the Foreign Earned Income Exclusion, here Taxable
income became $0 which means she was not allowed to
contribute. The tax return is not due until 6/15 because of
the automatic extension granted.

When she called Vanguard to remove the contribution, they
had her take a distribution from the account, rather than
fix the over-contribution. Therefore she was charged the
10% penalty. This happened today. Is there any way to
"fix" this mistaken transaction?

Thanks!
David.

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