I had a $1,000 excess Roth IRA contribution for 2024 due to my MAGI falling into the partial Roth IRA limit. I did not contribute to any IRA for 2023, and my 2023 Roth IRA limit should be higher than the 2024 excess amount. I have not yet filed my 2024 tax return and have not contributed to a 2025 IRA. My 2025 Roth IRA limit should be more than $1,000, which covers the 2024 excess.
Option 1: Withdraw the Excess and Earnings Before Filing 2024 Taxes
If I withdraw the excess plus earnings before filing my 2024 taxes, the earnings will be included in my 2024 taxable income.
Questions:
Since the earnings increase my AGI, they could create a cycle of additional excess contributions. How do I calculate a slightly higher withdrawal amount (e.g., $20 or $100 more) to prevent this cycle?
In this option, aside from ordinary income tax on earnings, is there a 10% early withdrawal penalty on the earnings? If so, where is it reported on my tax return?
Option 2: Recharacterize the Excess to a Traditional IRA, Then Convert to Roth (Backdoor Roth)
By recharacterizing the excess (plus earnings) to a Traditional IRA, then converting it back to a Roth IRA, I avoid reporting the earnings in 2024. Instead, I will receive a 1099-R in 2026 to report the conversion for 2025. The downside is more paperwork for both recharacterization and conversion.
Financially, Option 2 results in lower taxes than Option 1 since it avoids immediate taxation and penalties on earnings.
Do I understand correctly? Which option is better?
I would like to invite @DanaB27 to help me. Highly Appreciated!
