Roth IRA Contributions - penalties?

Hello,

I am a bona fide UK resident for 2013 and made a contribution to a Roth IRA that existed with US mutual fund company before I moved to UK in 2012.

Filing taxes this year I expected would be easy with Foreign Earned Income Exclusion (2555). However, when I do this, it says I must pay a 6% penalty on the Roth IRA contributions.

Anyone that has encountered this, any suggestions? I suppose the foreign tax credit (1116) might be another option?

Thanks

You must have taxable compensation equal to at least the amount of your traditional or Roth IRA contributions. As you have discovered, income excluded using Form 2555 is not considered taxable compensation. You can take a foreign tax credit instead and there will be no issue with your contributions.

Note, you get a UK tax deduction if you make traditional IRA contributions and then convert to a Roth, as opposed to making Roth contributions directly - see here: http://talk.uk-yankee.com/index.php?topic=80620.0. Once the funds hit the traditional IRA, you can do the conversion immediately if you wish.

If you have made a Roth contribution for 2013 it's not too late to take advantage of this strategy. You have until October 15, 2014 to recharacterize your contribution as traditional; you can then do a Roth conversion, as above.

Thanks very much for your helpful advice and reply here!