Excess Contribution to IRA in 2024, How to Address and Proceed Going Forward

[ChickenBurger]

Hello,

In 2024, I contributed the max to my Roth IRA, and later realized my income would have exceeded the limit. I then withdrew from the Roth, contributed to a Traditional, and did a conversion to Roth.

In hindsight I should have done a re-characterization, but my sequence of actions resulted in what looked like an excess contribution on paper even though the net amount that entered my IRA was within the limits.

I ended up paying some penalty when filing for tax year 2024 just so I can file on time. My question is, what is the best way to proceed now? My goal is to clear up any existing issues and get to a place where I can just do a backdoor roth conversion every year.

I'd prefer to just have a professional handle everything, would that be the TurboTax Live Full Service? Do I need to wait until the new tax season begins? I have not contributed anything in 2025 yet to any IRA and I want to make sure that I still max out my 2025 contributions.

[Opus 17]

I believe that the Live and Full Service programs will only help with 2025, and not a 2024 amended return. However, you could contact customer support to make sure.

Questions:

1. You can contribute for 2025 up through April 15, 2026, so you have plenty of time to figure things out.  Do you know at this point, whether you qualify for a Roth IRA or will be doing a backdoor conversion?
2. I assume you made the regular withdrawal in 2025 while preparing your tax return?  
3. Does your 2024 form 5329 contain a 6% penalty on part IV line 25?
4. Do you have any pre-tax money in any traditional IRA account?
5. Did you make the 2024 contribution before April 15, 2025, and did you report the pre-tax contribution on your 2024 tax return?

Principles

It is too late to remove the excess Roth contribution in a way that will avoid penalties in 2024.   If you reported the excess contribution using form 5329 on your 2024 return, then there is nothing to amend for 2024.  However, you will need to amend if you did not also report the traditional IRA contribution.  

It doesn't just "look like" you made excess contributions, you did in fact make excess contributions.  If you made both a $7000 Roth contribution and a $7000 traditional IRA contribution for tax year 2024 (prior to April 15, 2025) then you contributed $7000 excess.  That's what actually happened no matter what you intended. 

Conversions happen when they happen, they are not retroactive like contributions.  So if you made a 2024 contribution in 2025 (before April 15), and then did the conversion a few days later in 2025, the contribution is reported on your 2024 return but the conversion is reported on your 2025 return. This is perfectly ok and not a problem, the conversion is still tax-free as long as you don't have other pre-tax funds in any traditional IRA. 

The regular Roth withdrawal you made in 2025 will be reported on a 1099-R for 2025, and when you add that to your tax return, it will remove the holdover excess contribution, so there will be no ongoing penalty (but you still can't remove the penalty from the 2024 return). 

This situation will not interfere with a normal "backdoor" IRA for 2025.  You can make a non-deductible contribution to a traditional IRA for 2025 (any time from now until April 15, 2026), and convert it to a Roth IRA.  As long as you have no other money in a traditional IRA, the backdoor conversion will be tax free, and it will not interfere with the issue of clearing the 2024 excess.