Recently a reader sent me this Roth IRA related question:
I have a Roth IRA to which I have contributed 4,000 this year. Back in September I ran into an emergency (actually 3 in a row, isn’t that always the way!) which depleted my emergency fund and I also needed to pull $1,000 out of my Roth IRA. At that point it had only been in there a few weeks and I didn’t not purchase any securities with the money so no gains/losses were generated.
Well, now the emergencies are over and I can happily say the e-fund is fully restored. I would like to replace that $1,000 in my Roth IRA for 2006, but when I try to do so my (online) broker says I have maxed out for the year. Is this just a glitch in the software, or are they correct in saying that I can not contribute any more for this tax year? Since I have in fact put in $4,000. I see it as a net contribution of $3,000 since I withdrew $1,000. But of course we all know the government isn’t always so simple.
I told the reader that she should call up her online brokerage firm because they likely are just using software to decide whether or not she has reached her contribution limit. In an article I wrote back in June of this year suggesting that people use their Roth IRA’s as an emergency fund , I found that in the second chapter of IRS Publication 590, it states:
Withdrawals of contributions by due date. 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. (link )
Anyone have any thoughts on this? If I’m wrong, I’d really like to know but I think the IRS Publication is pretty clear on this issue. (By the way, I’m not advocating someone actually use a Roth IRA as an emergency fund, just mentioning that it’s theoretically possible even though it’s a headache practically)