Hi,
I was laid off in mid-2024 and only contributed to a 401(k) for the first six months of the year. I didn’t have access to a 401(k) for the remainder of the year. When calculating my Modified Adjusted Gross Income (MAGI), I initially thought I would be under the $240K limit for a married couple filing jointly, so in December 2024, I opened a Roth IRA and contributed $2,400. I did this because I was saving money separately, and I mistakenly thought a Roth IRA was a good option.
As of my January 2025 statement, the account has only earned 8 cents in interest—so there’s very little growth.
Now that I’m doing my taxes, I see that my MAGI is actually $254K, meaning I exceeded the contribution limit and am now facing a penalty.
TurboTax is giving me some options to avoid the penalty. One option (Option 2) seems to suggest that I can withdraw the full $2,400 from my Roth IRA and essentially close the account since I don’t qualify to contribute. Does this mean I can remove the entire amount as if I never opened the account and avoid the penalty?
The current penalty is about $150, but I’m more concerned that I’ll continue to be penalized every year. I’d rather close the account now if that’s an option.
Can you clarify if withdrawing the full amount will allow me to avoid ongoing penalties?
Thanks!
Turbo Tax Options Suggested
- Pay the penalty for an excess contribution. You'll need to pay a 6% penalty each year that the excess remains in your Roth plan. If a Roth IRA contribution is allowed next year (or any future year), excess contributions can be applied up to the contribution limit for that year and no longer subject to the penalty.
2. Withdraw the excess (including any money you earned on it) before the filing deadline for your tax return. If you do this, you'll need to correct the amount you entered in TurboTax as your contribution.
3. Recharacterize your Roth IRA contribution to be a traditional IRA contribution. That means that you instruct the account trustee to move the money to a traditional IRA and treat it as if that's where you made the original contribution.
Of course, if you haven't yet made your 2024 contribution (you have until the due date of your return, including extensions, to make IRA contributions) you can avoid this situation by simply not making the contribution.
