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. 

[ChickenBurger]

Appreciate the response, some more details below:

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?
   1. I will need to do a backdoor conversion for 2025 contributions
2. I assume you made the regular withdrawal in 2025 while preparing your tax return?  
   1. No, the withdrawal was made in 2024 after realizing my income would have exceeded the limits. All of the contribution/withdrawal actions took place during calendar 2024
3. Does your 2024 form 5329 contain a 6% penalty on part IV line 25?
   1. Yes, line 25 contains a 6% penalty
4. Do you have any pre-tax money in any traditional IRA account?
   1. No pre-tax money. There's a few hundred there, can't recall if I didn't convert all of it or what happened, but it was contributed during CY2024
5. Did you make the 2024 contribution before April 15, 2025, and did you report the pre-tax contribution on your 2024 tax return?
   1. Not sure I understand the second part of this. 2024 contributions were made during CY2024 using post-tax money and I did not deduct the contribution during filing

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.  

I'm ok with the penalties paid for 2024 filings. The goal is to ensure there are no recurring penalties or issues going forward. 

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. 

Not disputing excess contributions, just noting that net inflows (looking at contributions & withdrawals) into all IRA accounts were still under the annual limit, though I suppose that doesn't matter from a tax perspective

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. 

If I'm understanding correctly, there's nothing that must be done before Dec 31st, I have until Apr 15 2026 to put money into my IRA for CY2025? Can I do a backdoor conversion for 2 years at once? $14,500 for 2025 & 2026 in one go?

Thank you

[Opus 17]

@ChickenBurger 

Because you made the regular withdrawal in 2024, and not 2025, it did not have the opportunity to "clear out" the excess contribution.  Look at form 5329 from your 2024 return, line 24.  If that shows an amount, that is the amount of excess that is being carried into 2025.   You need to make a regular withdrawal in 2025, before December 31, of the amount shown as excess Roth contribution on your 2024 form 5329 at line 24.  That regular withdrawal will count as a removal of the excess that was carried forward.   It should not be taxable, unless you are under age 59-1/2 AND the withdrawal cuts into conversions that are less than 5 years old.

Then, you can separately, still do a "backdoor" conversion in 2025 via the normal method.

Yes, you can do a backdoor conversion of more than one year's contributions at a time.  For example, on January 15, 2026, you contribute $7000 designated for 2025.  Then on January 20, you contribute $7500 designated for 2026.  Then on January 25, you convert $14,500.  That will work fine.  Just be aware that the non-deductible 2025 contribution will be reported on your 2025 return, but the non-deductible 2026 contribution and the 2026 conversion won't be reported until your 2026 tax return filed in the Spring of 2027.