I am 52 years old and have 2 Roth IRA accounts with Fidelity and Vanguard. Accidently I exceeded my 2021 contribution limit by $2500. I would like to apply excess to 2022. Vanguard notified me that they're not able to apply excess contribution to current (2022) year and I have to withdraw the excess contribution plus earnings. I argued that according to IRS publication 590A : "
Applying excess contributions.
If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year."
I understand that I will still pay 6% penalty but would avoid paying 10% early withdrawal taxes plus taxes on earnings. What would be the suggestion?
Yes, you can apply the excess contribution to 2022 but you won't need to use Vanguard for that. You will be able to enter it on your 2022 tax return but you will have to pay the 6% penalty for 2021.
Please be aware, the 10% early withdrawal penalty is only on the earnings. But if you had a lot of earnings then it might be beneficial to leave the excess in the account, pay the 6% penalty and then apply the excess to 2022 (if you are allowed to make the contribution then).
Please follow these steps on your 2022 return to apply the excess to 2022: