To avoid a penalty and double taxation, the distribution must be made as an explicit return of excess contribution, not a regular distribution. The amount distributed must be the $121 excess adjusted for investment gain or loss.
When you tell TurboTax that your wife will remove the excess $121 contribution, TurboTax will include the $121 in your 2023 income since it was excluded from box 1 of you wife's W-2. If there is any investment gain that is distributed along with the returned contribution, that will be taxable income on your 2024 tax return.
