I have been doing a lot of digging trying to fully understand my best options and what I have learned is you seem to be putting me on the right track. The specific circumstance is that I was buying Ford stock as it was collapsing due to Covid, so my starting balance, in MAY20, is artificially low, then in June I contributed more for the tax year 2020 and I continued buying Ford stock. It has rebounded, creating the hypothetical you qualified in your response.
Here it is in a nutshell by definition of a formula I found;
My adjusted opening balance, the ROTH IRA balance on 31MAY20 plus the $7,000.00 equates to $12,950.66. I contributed in two segments over the course of tax year 2020 , $5,029.00 in JUN 2020 and $1,971.00 on 31DEC20.
My theoretical adjusted closing balance, I am using the closing balance on 31JAN21, is $17,694.36. (This balance was up almost $2,000 by mid-February. I have not decided how to handle this yet, but your comment looks like the winner.)
IRS Formula for net income calculation:
Excess Contribution * (adjusted closing balance - adjusted opening balance) / adjusted opening balance
$7,000 * ($17,894.36 - $12,950.66) / $12,950.66 = $2,564.03
I cannot contribute to the ROTH due to our MAGI, we are in the 24% tax bracket this year so, IRS formula for Net Income yields - ($2,564.03 * .24) (24% Federal Income Tax on ordinary income) = $615.367 TAX
plus I haven't taken into consideration the State of MI 4.35% income tax.
In this instance it appears that standing pat, leaving the gains in place while "carrying forward" the contribution for the tax year 2021 and paying the excess contribution federal penalty of ($420), makes the most sense? Would you agree with that?
