Hi all,
This year I started and contributed to a ROTH IRA (2023). However, now that we’re nearing the end of the year I realized I exceeded the income limits. Meaning I shouldn’t have contributed anything to it. I contributed 6,500 and now obviously that has grown - let’s say to 7,000. I therefore sold all the assets and plan to withdraw the 6,500 since the 6,500 was the contribution that shouldn’t have occurred and those are typically tax/penalty free. With the 500 left over, if I withdraw it within the same year (2023) will fidelity correctly characterize the money? Or is there something specific I need to do to correctly report the gains? Will they be characterized as capital gains OR ROTH IRA income? Am I better off just leaving it in the ROTH IRA and pay 6% (I will likely exceed the limits next year as well). I just want to be sure I’m not going to be taxed on the 6,500 AGAIN as this was post-tax money. Thanks.
Simply withdrawing $6,500 does not undo the Roth IRA contribution. If you want to undo the contribution you must explicitly request a return of contribution. The Roth IRA custodian will then calculate the income attributable to the excess contribution and distribute the combined amount. The attributable income will be taxable on your 2023 tax return and will be treated as ordinary income. Nothing earned in an IRA treated as capital gains. The $6,500 portion distributed will not be taxed. Fidelity has a specific form for requesting a return of contribution.
You also have the option to recharacterize the contribution to be a traditional IRA contribution instead. The $6,500 plus the attributable income would be transferred to a traditional IRA. The attributable income will simply become income in the traditional IRA. The resulting traditional IRA contribution may or may not be deductible depending on whether you or your spouse is covered by a workplace retirement plan.
Whichever you do, your 2023 Form 5498 from the Roth IRA will show a $6,500 contribution. You'll receive a Form 1099-R (a 2023 form in the unlikely event that the transaction can be accomplished in 2023, otherwise a 2024 form) showing either the return or recharacterization.
If you fail to make the correction, you'll have a 6% penalty on the $6,500 each year until you correct the excess.
Simply withdrawing $6,500 does not undo the Roth IRA contribution. If you want to undo the contribution you must explicitly request a return of contribution. The Roth IRA custodian will then calculate the income attributable to the excess contribution and distribute the combined amount. The attributable income will be taxable on your 2023 tax return and will be treated as ordinary income. Nothing earned in an IRA treated as capital gains. The $6,500 portion distributed will not be taxed. Fidelity has a specific form for requesting a return of contribution.
You also have the option to recharacterize the contribution to be a traditional IRA contribution instead. The $6,500 plus the attributable income would be transferred to a traditional IRA. The attributable income will simply become income in the traditional IRA. The resulting traditional IRA contribution may or may not be deductible depending on whether you or your spouse is covered by a workplace retirement plan.
Whichever you do, your 2023 Form 5498 from the Roth IRA will show a $6,500 contribution. You'll receive a Form 1099-R (a 2023 form in the unlikely event that the transaction can be accomplished in 2023, otherwise a 2024 form) showing either the return or recharacterization.
If you fail to make the correction, you'll have a 6% penalty on the $6,500 each year until you correct the excess.