Mistakenly Made Excess Contribution to IRA

[curlytwotoes]

Thanks @Opus 17.

Instead of taking the 10% penalty for withdrawing the excess $1000 in 2025, could I just leave it in the account and then just take another 6% penalty for keeping the excess funds in the account? I figure 6% is better than 10%, no? Or am I completely wrong about that?

[Opus 17]

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@curlytwotoes wrote:

Thanks @Opus 17.

Instead of taking the 10% penalty for withdrawing the excess $1000 in 2025, could I just leave it in the account and then just take another 6% penalty for keeping the excess funds in the account? I figure 6% is better than 10%, no? Or am I completely wrong about that?

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Yes, you could do that.  It depends on what you plan to do in 2026 (next year).  As long as you contribute $1000 less than your Roth maximum contribution in 2026, this $1000 excess can be applied to the 2026 contribution limits.  That will zero it out (use it up) and you would pay 6% this year and nothing next year.  

The problem is defining "your Roth IRA maximum contribution" for 2026.  I see you are doing backdoor Roth contributions.  If you are doing this because you are over the limit to make Roth IRA contributions, then your Roth IRA contribution limit is zero.  That means that even if you contribute less than the full allowable limit of $7000 to the traditional IRA, the unused limit will not flow to the Roth IRA section of form 5329, and in that case, you will pay another 6% penalty next year, and every year after, until you can either apply the excess to your Roth IRA limit (if your income drops) or you withdraw it.  

(If you had an excess contribution in a traditional IRA, you could contribute less than your maximum to a traditional IRA and use up the prior excess.  Or, if your income is low enough to allow at least $1000 of Roth IRA contribution, then you can apply the prior excess to your 2026 limit.  But if your 2026 Roth limit is zero, this doesn't work.)

[curlytwotoes]

Yes, @Opus 17 I think I understand what you're saying. Let me try to restate what you said just to make sure:

For 2024, I contributed directly $7000 to a Roth IRA, then recharacterized that amount to a Traditional IRA, and then converted that amount to Roth IRA. The excess $1000 which I then contributed later accidentally, was contributed directly to a Traditional IRA, then converted to a Roth IRA. So $8000 total to IRAs, which I pay the 6% penalty on the excess $1000.

For 2025, I already contributed directly $7000 to a Traditional IRA and then converted to a Roth IRA. And because I can't do anything with this either because I hit the max, I can either withdraw $1000 from my Roth and take a 10% penalty or I can carry the 6% excess penalty again for this year.

For 2026, I plan to do backdoor Roth IRA contributions as well since my income likely will not drop below the maximum allowable amount. However, since I am doing the backdoor Roth conversion, even if I were to contribute $6000 (instead of the max of $7000) to my Traditional IRA and convert it to my Roth, it would not count because as you said "the unused limit will not flow to the Roth IRA section of form 5329." Meaning I'd still be paying the excess 6%.

So in essence, I am better off just withdrawing $1000 from my Roth sometime in 2025 and taking the 10% early withdrawal penalty since my income will remain too high to directly contribute to my Roth in the near future and would be taking a 6% penalty every year instead.

Did I understand all of this correctly?

[Opus 17]

@curlytwotoes 

This is the key,

For 2026, I plan to do backdoor Roth IRA contributions as well since my income likely will not drop below the maximum allowable amount. However, since I am doing the backdoor Roth conversion, even if I were to contribute $6000 (instead of the max of $7000) to my Traditional IRA and convert it to my Roth, it would not count because as you said "the unused limit will not flow to the Roth IRA section of form 5329." Meaning I'd still be paying the excess 6%.

If your income is above the Roth contribution limit, then your contribution limit for a Roth IRA is zero, no matter how much or how little you contribute to a traditional IRA.  In other words, even though most people have a combined limit of $7000 that can be split between a traditional and Roth IRA, you do not.  Your contribution limit is $7000 for a traditional IRA and zero for a Roth IRA.  And that, in turn, means that there is no way to contribute less than your Roth limit in order to absorb the prior Roth excess contribution.  Meaning you will pay the 6% penalty on the $1000 prior excess contribution every year until you withdraw it, or your income drops below the Roth contribution max.  

[curlytwotoes]

Thanks for helping @Opus 17. I'll withdraw the excess $1000 in 2025 so I won't have to face future penalty.