What to do - contributed to Roth IRA when I should not have

[justintime58]

Hello - 

Hoping for some help here. For TY 2022 and 2023, I filed married but separately (MFS) from my wife due to her student loan repayment plan. In those years, I have worked where I contribute into my employer sponsored 401K and a Roth IRA, in addition to my employer contributing to a pension plan. When I first started in this role, I misread the literature from the retirement system manager and opted to contribute to the Roth IRA, but it seems that I was ineligible so I have contributed excessively for CY2022 and CY2023. 

For CY2024, I think we are going to file jointly so that those contributions to the Roth IRA will be OK. I spoke with the retirement system manager, and they indicated I couldn't recharacterize 2022 and 2023 contributions/earnings (the contributions are automatically invested into a target fund). 

From speaking with local tax preparers, they've indicated that I may or may not need to amend 2022 and 2023 taxes, but I do need to withdraw (and pay the 10% penalty since I am 36), and then pay the 6% penalty on the earnings of those funds, and then get taxed by state/federal income taxes. 

Is that all correct and/or do I have any other options at hand? Trying to wrap my head around this all has been difficult. 

Thanks for your help. 

[MindyB]

For 2022 and 2023, unfortunately, you can't recharacterize because it is too late.  The rules for recharacterization are that it must take place by the tax filing deadline. So, if you file an extension, you have until the extended tax filing deadline, typically October 15. (So 2022 Roth contributions would need to have been recharacterized by 10/15/2023).

There are a couple of options for you for your 2024 contribution if you do not filed jointly, which you can read about here: What happens if I made an excess Roth IRA contribution because my modified adjusted gross income is ...?  

• Apply the excess to next year 
• Remove only the excess contribution after your tax deadline- 6% excess contribution penalty on the 2024 return, but you can keep the earnings in the Roth account
• Withdraw the excess contribution plus earnings- No 6% penalty for 2024 excess contribution on 2024 tax return

For the 2022 and 2023 excess contributions, you should have paid a 6% penalty in 2022 and 2023 on your 1040, so you should amend those years. You are subject to a 6% penalty on the excess contributions for every year that the money stays in the account. So 2022, 2023, and 2024 tax returns (unless you remove 2022 and 2023 contributions and earnings before you file your 2024 return) will all have a 6%  penalty. You will need to remove the money and pay the 10% early withdrawal penalty to avoid the 6% tax being charged yearly.