Correcting this excess contribution is a pretty straightforward process. Since the extra $1,000 contribution for 2023 was not corrected by the tax deadline, the IRS charges a 6% penalty for each year the money remained in your 1,000 contribution to your 2023 Roth IRA. Because you didn't fix it by the tax deadline, you now owe a 6% penalty for each year that money was in the account. Your broker reclassifying it in July 2025 fixes the problem going forward, but it doesn't erase the penalties you already owe.
Interest and Penalties
- The 6% Penalty: The $60 penalty for 2023 and the $60 penalty for 2024 are fixed amounts. They do not compound daily like standard tax underpayments.
- Interest on the Unpaid Penalty: The IRS will charge interest on your late-paid penalty. This interest starts accruing on the due date of the tax return for the year the penalty is owed.
- The interest rate is determined quarterly and is the federal short-term rate plus 3%. It compounds daily. For the first two quarters of 2025, the annual interest rate on underpayments for individuals was 7%. It is likely a similar rate for the third and fourth quarters.
How to Estimate the Interest You Will Owe:
- For the 2023 Penalty: The $60 penalty was due on the tax filing deadline for 2023 (April 15, 2024). Interest will accrue on that $60 from April 15, 2024, until you pay it.
- For the 2024 Penalty: The $60 penalty was due on the tax filing deadline for 2024 (April 15, 2025). Interest will accrue on that $60 from April 15, 2025, until you pay it.
While I can not provide you with an exact amount of interest it will be relatively low, all things considered. The most important thing is to file your amended 2023 return and your 2024 return with the correct Form 5329s as soon as possible. This stops the interest "meter" and prevents any further penalties from accruing.
How to correct this in TurboTax
- Amend your 2023 Tax Return
- You have to go back and correct your 2023 taxes to report the initial penalty.
- In TurboTax, find the option to "Amend a filed return."
- Go to the IRA section and let the program know you had an excess contribution for 2023.
- The software will generate Form 5329 for you. It will calculate the $60 penalty and add it to your amended return.
- File this amended return and pay the $60 tax.
- File Your 2024 Tax Return or Amend original 2024 tax return if already filed.
You must file Form 5329 with your 2024 return to report the second penalty.
- Go to the IRA contributions section for your 2024 taxes.
- The program will ask if you had an excess from a prior year. Say "Yes."
- This will open up Form 5329 again.
- On Line 18, enter the $1,000 excess amount from your 2023 return.
- The software will then calculate the new $60 penalty for 2024.
- It will also show that the excess was corrected by being applied to your 2024 contribution, so no penalty will carry forward.
Helpful Links:
Please feel free to reach out with any additional questions or concerns you may have and
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Terri H.
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