@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?
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.)
