During the 2023 tax year I contributed $3500 both to my Self Employment Individual Roth 401k and my wife's Individual IRA. For the last 8 weeks business has plummeted from last year's 5 clients/day to 2 clients/week and my wife and I have agreed to withdrawal this current 2023 tax year's contributions of $3500 mine + $3500 hers which should avoid the 10% penalty. This will give us a cushion of a few months while I figure out what I can do in order to provide.
I read IRS Pub 590b where on page 31 it states, "Withdrawals of contributions by due date. If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions."
I'm ready but I have not filed my 2023 1040 yet and this wording suggests that if I do withdrawal this then I need to add the earnings to my income for 2023 before filing.
Is there a 10% penalty on withdrawn contributions during by the due date?
Do earnings have to be pulled out? I hear they may be subject to a 10% penalty.
How is this process even initiated with Vanguard? They only point me to an excess withdraw form but none of the four options appear to fit:
Nondeductible contribution: Employer contributions to a qualified plan in excess of the applicable deduction limit for the plan year.
Excess deferral: Employee deferral in excess of the limit under the Internal Revenue Code (IRC) Section 402(g).
Excess annual additions: Total additions to a participant’s account, which exceed the lesser of 100% of the participant’s compensation or the dollar limits under 415©. These may include both salary deferral contributions and employer contributions.
Mistake of fact: A mistaken contribution (generally due to a mathematical error). The types of errors that may be considered a mistake of fact are very limited (see IRS Revenue Ruling 91-4).
None of these sound like this situation as neither account was contributed to over the $6500 limit. Thank you.
