2023 Roth IRA Excess Contribution - $138K Threshold

[CarlAviara]

TurboTax calculated that I overcontributed $50 to my Roth IRA in 2023 based on my income of $138,137 (which is just over the $138,000 threshold when the IRA contribution limit starts going down). Per TurboTax, my contribution limit was $6,450, instead of the max $6,500. So I called my Roth IRA administrator and withdrew $56 in March 2024 from my Roth IRA ($50 excess contribution plus $6 earnings). The $6 in earnings is taxable in 2023 as income (reported via a manual 1099-R). The $6 raised my 2023 income to $138,143, which in turn, per TurboTax, further lowered my Roth IRA contribution limit to $6,440 from $6,450. Now TurboTax is saying I overcontributed $10 and will have to pay a 6% penalty of $1.

What would be the best way to handle this situation? I'm concerned that, if I withdraw another $10 from my Roth IRA (plus any earnings), my 2023 income would slightly rise again from the earnings, and then my Roth IRA contribution limit would be lowered again, bringing me back to the same situation.

Is it best to just report the $56 withdrawal on Form 5329 as part of my 2023 return and simultaneously pay the 6% $1 penalty on the $10 excess contribution? Then I could just count the $1 excess contribution as part of my 2024 contribution to my Roth IRA, ending the annual 6% penalty and call it a day?

Thank you.

[dmertz]

Such is the problem with dealing with excess Roth IRA contributions when you are in the phase-out range of the contribution limit.

Your suggested approach is simplest and will work as long as you will be eligible to contribute at least $10 to your Roth IRA for 2024.

If you are unsure if you will be eligible to contribute $10 for 2024, pay the $1 penalty for 2023 and make a regular distribution (not a return of contribution) of exactly the $10 excess (with no adjustment for earnings) after October 15, 2024 but before the end of 2024 to resolve the excess for 2024 by being included on your 2024 Form 5329 line 20.  This $10 regular distribution would be a tax-free distribution of contribution basis.  Once you have prepared your 2024 tax return you'll be able to determine how much you can contribute to a Roth IRA for 2024.

[CarlAviara]

@dmertz Thank you so much for the guidance! When I withdraw the excess contribution of $10 before the end of 2024, will I have to withdraw the earnings also at that time? Or will I just leave the earnings in the Roth IRA and pay taxes on those earnings when I file my 2024 return?

[dmertz]

No earnings are to be withdrawn with the $10.  Just like any ordinary earnings in your Roth IRAs, any earnings on the $10 will never be taxed as long as you do not distribute any earnings before your Roth IRAs are qualified.  The only the $6 of earnings already distributed with the $50 return of contribution are taxable on your 2024 tax return.

Make sure that you request a regular distribution of $10, not a return of contribution.  So that the custodian does not process the distribution as anything other than a regular distribution, mention nothing about this distribution being done n to correct an excess contribution.