Traditional IRA is a tax-deferred money. In 2007, you can contribute up to $4000, but whether it can be deductible depends on your Modified AGI. That means if you put this $4000 in your Form 1040, but later your modified AGI makes it phase out, you could not deduct part or all, the excess part has to be the following options:
1. before due date, withdraw the excess contributions, this will be treated as not contributed, so no any penalty, but the earning from this part will be subject to tax.
2. you can design the excess part as Non deductible IRA and pay the tax, so no early distribution issue, but remember you have to pay tax on this part, just earning from Non deductible IRA is tax-deferred
If you dont withdraw the excess part, there is exercise tax on this part (about 6%).
So first you should understand what tax part IRA got from you, it includes exercise tax and 10% early distribution penalty, it includes any tax on this $4000 and its earning, it seems you put in 2005, if not qualifed, it already passed 2 years, maybe you never pay tax and it earning on this $4000, just paid exercise tax and penalty. hope it helps.
