Excess 2025 Roth IRA Contribution - What to do?

[taxesareamaze-ing]

TurboTax is telling me that I contributed too much to my Roth IRA since as a freelancer my taxable income was lower than what I put into my Roth IRA account in 2025.  Can I request the financial institution return the excess amount plus/minus gains/losses on that amount direct to my personal (checking) account? Or must I recharacterize that excess amount directly to a Traditional IRA account?

For context TT told me:
"Roth IRAs

You had Roth excess contributions of $.....

To avoid a penalty you can withdraw these excess contributions before the due date of your return.

If you have withdrawn all or some of these contributions, enter the amount withdrawn below.

Roth contributions withdrawn before April 15, 2026"

[baldietax]

Can you clarify how much you contributed - "as a freelancer my taxable income was lower than what I put into my Roth IRA account in 2025"

Do you mean your compensation was too low to cover the contribution (at most $7000 or $8000 if 50 or older), or did you misunderstand the upper contribution limit?

The same upper and compensation limits apply for Trad IRA contributions if you plan to recharacterize, it's just a question of whether you qualify to make a Roth contribution or deductible Trade IRA contribution due to the MAGI phaseouts.  If you do recharacterize say to a non-deductible Trad IRA contribution then your basis will be the original amount of the Roth contribution, and any gains/losses are treated as having happened in the Trad IRA.

see 590a "excess contributions" and "recharacterization" sections for guidance

https://www.irs.gov/pub/irs-pdf/p590a.pdf

note the time limit to sort this out includes extensions so you might need to do that to provide time to sort it out with your brokerage.

[Opus 17]

First you need an extension.  The bank probably can't process your withdrawal in time.

Then, yes, you can only contribute to an IRA up to your "compensation" from working, that is W-2 box 1 wages, plus about 92% of your self-employment income.  To avoid a penalty, you need to withdraw the excess contributions before the extended tax deadline (which is April 15 if you don't ask for an extension and October 15 if you do ask for an extension.)  The broker will also withdraw for you any earnings that are attributed to the excess contribution.  You report those earnings as taxable income on your 2025 tax return because they were 2025 contributions, even if the actual withdrawal happened in 2026.

To report the withdrawal of the excess, enter a fake 1099-R (not a substitute 1099-R, enter it as if you got a real 1099-R).  The total withdrawal is in box 1, the taxable earnings are in box 2a, and use code PJ in box 7.  The PJ code will tell the IRS and the tax program that this is interest on a withdrawal of excess.  

[fanfare]

You can remove excess plus earning by Oct 15 if you have

1. Timely filed by tax day, or
2.  requested an extension of time to file by tax day

Option 1 requires a 1040-X amendment.

Option 2 does not.

@taxesareamaze-ing 

Depending on how well your Roth investment is going, you may want to wait six months.

After the extension deadline you pay a 6% penalty but your earnings will stay in the Roth IRA untaxed.

[taxesareamaze-ing]

It was five thousand 

[taxesareamaze-ing]

When excess is removed where does it or can it go?  Straight to me as a check or deposited to my checking savings account then I do what I want with it?  or must I have it transferred financial institution holding Roth IRA to same institution or other institution holding traditional IRA?  

Must the excess be cleared from the Roth IRA by end of business day April 15 (or by extension date)? 

[Opus 17 · Accepted solution]

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@taxesareamaze-ing wrote:

When excess is removed where does it or can it go?  Straight to me as a check or deposited to my checking savings account then I do what I want with it?  or must I have it transferred financial institution holding Roth IRA to same institution or other institution holding traditional IRA?  

Must the excess be cleared from the Roth IRA by end of business day April 15 (or by extension date)? 

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Once you withdraw the excess contribution you can do anything you want, it's just ordinary money at that point.

The deadline is a little tricky to explain.  If you timely file your tax return, the deadline to remove the excess is October 15.  If you do not timely file your return the deadline is April 15.  That means the transaction must be "settled" by close of business on that date or earlier.  Settled does not necessarily mean it hits your bank account (because of variation in how banks process ACH transactions) but the broker must record the money as paid out by that date.  Because there is a lot of tax related business at this time of year, your withdrawal may not settle at the broker by close of business tomorrow if you initiate it today.  

Timely filed means either,

(a) you get an extension and file your return by October 15, or

(b) you file by April 15 without reporting the withdrawal, and then file an amended return by October 15 to report the withdrawal and attributed interest.

If you miss the April 15 deadline and don't get an extension, your withdrawal deadline is April 15 and there is no wiggle room or exceptions.  

If you request an extension, then perform the withdrawal, and then file, you can include the attributed earnings on your tax return.  That return usually takes 3 weeks or less to process and then you are finished.  If you do not request an extension, and file by tomorrow without including the withdrawal, you will have to file an amended return after you perform the withdrawal.  Amended returns take 4-6 months to process.  For several reasons, it is usually a better idea to get the automatic extension and then file one correct return when you have all the facts, rather than filing an incorrect return and amending it later.  

@baldietax is further suggesting that if you get an extension, you can wait until October to decide if you want to remove the excess at all.  If you do not remove the excess, you will pay a 6% penalty on the excess contribution, but depending on what you invested in and how the market performs, you might earn more than 6% on your investment so you would come out ahead by leaving the money in the account and paying the penalty.  It's a bit of a gamble, and it also means you have to pay very close attention to calculating the Roth contributions you make for 2026 so you don't have a continued excess contribution to deal with.  

[taxesareamaze-ing]

Great advice @Opus 17 @baldietax @fanfare 

Thank you!

I've got 3 more main questions for you all:

1) Am I avoiding the 10% early withdrawal penalty given the fact that it is excess?  Older (2024 and before) blog posts talk about still needing to pay that penalty despite withdrawing excess.

2) Going to get started on a federal extension.  This is for federal only correct?  State would be a separate extension?  And the Roth IRA penalty, rules, etc. is only for federal taxes?

3) Would I still need to pay the 6% (possible penalty if I decide by October to keep that excess in my Roth) by tomorrow April 15?  What if I do not pay that penalty by April 15 while still getting an October extension?

Turbo tax tells me:

"If you can't finish your return by April 15, 2026, an extension will give you more time to file.

• An extension only extends your time to file your return.

  There's no extension for paying any taxes you owe.

• If you owe taxes, we recommend paying the full amount before April 15, 2026.

  This keeps any interest and penalties to a minimum."

[Opus 17]

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@taxesareamaze-ing wrote:

Great advice @Opus 17 @baldietax @fanfare 

Thank you!

I've got 3 more main questions for you all:

1) Am I avoiding the 10% early withdrawal penalty given the fact that it is excess?  Older (2024 and before) blog posts talk about still needing to pay that penalty despite withdrawing excess.

2) Going to get started on a federal extension.  This is for federal only correct?  State would be a separate extension?  And the Roth IRA penalty, rules, etc. is only for federal taxes?

3) Would I still need to pay the 6% (possible penalty if I decide by October to keep that excess in my Roth) by tomorrow April 15?  What if I do not pay that penalty by April 15 while still getting an October extension?

Turbo tax tells me:

"If you can't finish your return by April 15, 2026, an extension will give you more time to file.

• An extension only extends your time to file your return.

  There's no extension for paying any taxes you owe.

• If you owe taxes, we recommend paying the full amount before April 15, 2026.

  This keeps any interest and penalties to a minimum."

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Yes, the federal extension only applies to the IRS.  Since you generally can;t file your state unless you also file a federal return, you should request a state extension as well.

The special rules for excess IRA contributions only apply to the federal return.

If you decide to leave the funds in the IRA and pay the 6% penalty, the IRS will consider the tax was due April 15, and they will probably send you a bill for interest and penalties for late payment, retroactive to April 15.  The combined amount of penalty and interest is approximately 1% per month of the amount owed.   Assuming your excess is $5000 (you were not clear if that was the excess or the total contribution, but using $5000), the penalty would be $300 per month, plus $3 per month interest and penalties for paying late.

To prevent owing a late payment, you can make an estimated payment now when you file for the extension, or separately at www.irs/gov/payments, and be sure to select form 1040 and tax year 2025 from the menus.  If you did decide to remove the excess, this will come back to you in your tax refund.  Of course, if you are already expecting a refund, then when the penalty is added the refund would just go down and there would be no penalty for late payment of taxes.  

[fanfare]

"If you decide to leave the funds in the IRA and pay the 6% penalty, the IRS will consider the tax was due April 15, and they will probably send you a bill for interest and penalties for late payment, retroactive to April 15."

I don't believe it works that way, the 6% per year is a flat penalty.

"early withdrawal 10%"

the early withdrawal penalty applied only to positive earnings. that penalty has been eliminated.

After the filing date including extensions, positive earnings will remain in the account.

@taxesareamaze-ing 

[Opus 17]

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@fanfare wrote:

"If you decide to leave the funds in the IRA and pay the 6% penalty, the IRS will consider the tax was due April 15, and they will probably send you a bill for interest and penalties for late payment, retroactive to April 15."

I don't believe it works that way, the 6% per year is a flat penalty.

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Your taxes are due April 15.  Whatever they are -- income tax, SE tax, and penalties.  All due April 15.  If you pay your taxes after April 15, there is a failure to pay penalty of 0.5% of the unpaid amount per month, plus statutory interest at a variable rate which is around 8% APR right now.    So yes, the penalty for excess IRA contributions is 6%, but on top of that there is a penalty on any taxes that are unpaid as of April 15.  

(Naturally, if the taxpayer expect a refund, there is no penalty for underpaying.  So if the taxpayer is in a position to expect a refund of $1000 with the penalty and $1300 without the penalty, there is no extra penalty for filing late.  But if the taxpayer is in a position to expect a $100 refund if they remove the funds and to owe a $200 payment if they owe the penalty, that unpaid $200 is subject to a failure to pay penalty plus interest.)