Last year (2022) I unexpectedly exceeded the Roth IRA contribution limit and had to do a Removal of Excess Contribution and associated gains. This was discovered in February 2022 and at that point I had already made some 2023 Roth IRA contributions. Fearing that I would also exceed the contribution limit in 2023 I did not make any more Roth IRA contributions. In October 2023 I made an estimate of my MAGI and determined that I was going to exceed the limit again. I then had my bank process the excess removal for my 2023 Roth IRA contributions and associated gains. I wanted to get this done before year end so that it would show up on my 2023 1099-R and be "cleaner".
Turns out I mistakenly used the 2022 MAGI limits as I didn't realize they had increased for 2023. My MAGI for 2023 did not exceed the Roth IRA contribution limit. So, now what do I do?
Because I processed the withdrawal as a removal of contribution and the 1099-R Distribution Code is "8J," I believe I'm only taxed on the gains and will also have to pay the 10% penalty (on the gains). Since I didn't "need" to remove the contribution, I cannot avoid the 10% penalty and claim it was for a "Corrective distribution made before the due date of the return."
For the purposes of illustration, let's say I contributed $1000. My bank processed the excess removal and calculated $200 in gains. My 1099-R shows a $1200 distribution with only a $200 taxable amount. I will need to pay tax and the penalty only on the $200 portion.
On a side note, if I really wanted to, I could actually contribute up to $5500 for 2023 still. The 2023 Roth contribution limit for under 50 is $6500, however I have already contributed $1000 (it still counts even though it has been removed).
Please confirm my understanding or correct me where I've gone wrong. Thank you in advance for your advice!
