How to correct 2022, 2023 and 2024 excess contributions to Roth and Traditional IRAs when withdrawing in 2025.

[xT_Tx]

Hello. I don't have much financial literacy so please excuse me if I make mistakes. I just found out that the annual IRA limit is for all IRA accounts combined and not each separately. It's now February 2025; I haven't filed 2024 taxes yet. How do I go about in correcting the excess contributions in 2022, 2023, and 2024 and how do I report this in TurboTax?

A little backstory: I made contributions 2x a month to both Roth and Traditional IRA accounts. I know when determining excess IRA contributions, the "time of contribution" is important as the last contribution made within a given year is generally considered the "excess contribution" if the total contributions exceed the annual limit. So I've tracked the contribution that pushed me over the limit for 2022's Roth and Traditional IRAs and it was on 9/1/22 until the end of the year, totaling $984.57 for Roth and $2,000 for Traditional. For 2023, the excess contribution was made since 9/15/23 till end of the year and the excess contributions to Roth IRA was $1,067.71 and Traditional was $1,750. For 2024, the excess contribution was made since 9/3/24 till end of the year for Roth with excess contributions of $1,539.72 and Traditional was $1,750 (since 9/15/24-12/31/24). 

I have not withdrawn any excess contributions yet as I am doing a lot of research and still confused by the whole process. I read online that I need to withdraw the excess and also its earnings, but just for 2024 contributions. The earnings can be calculated by using the IRS formula NIA = Excess contribution x [(adjusted closing balance - adjusted opening balance) / adjusted opening balance]. But in order for me to do the equation, I need the IRA balance the day before the excess contributions were made to find the adjusted opening balance. At the moment, I do not have the IRA balances for the day before the excess contribution was made, as I am waiting to hear back from my IRA provider for both accounts. After knowing the NIA, I can then withdraw the earnings along with the excess contributions. 

So after withdrawing, I have to amend 2022 and 2023 TurboTax by reporting the excess contributions. How do I do that? Would amending come before or after filing 2024 tax return?

Thanks for taking the time to read through my problem and for any help/advice given! 

[DanaB27]

Yes, you would have to request the return of the 2024 excess contribution plus earnings with your financial institution. They usually will calculate the gain for you. The earnings of the excess contribution would be taxable on your 2024 return. You could remove all excess from the Roth IRA since generally when you contribute to both traditional and Roth then the excess is deemed to have happened in the Roth IRA (IRS).

If you made an excess contribution in 2024 and withdrew the 2024 excess Roth IRA contribution plus earnings in 2025 before the due date, then you will get a 2025 Form 1099-R in 2026 with codes P and J. This 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2025 Form 1099-R into the 2025 tax return since the withholdings are reported in the year that the tax was withheld. The 2025 code P will not do anything to your income to the 2025 tax return income but the withholdings will be applied to 2025.

To create a Form 1099-R in your 2024 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2024?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On "Is the IRA/SEP/SIMPLE box on this 1099-R checked?" screen answer "No, the box is blank"?
11. On the "Which year on Form 1099-R" screen say that this is a 2025 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024.

For the 2022 and 2023 excess you will request a regular distribution without earnings since it is after the due date. This distribution will be reported on your 2025 return.

Yes, you will need to pay the 6% penalty on your 2022, 2023 and 2024 return for the excess contribution for 2022 and 2023.

• On your 2022 your will pay the 6% penalty on the 2022 amount (enter all your contributions in the IRA contribution section).
• On the 2023 and 2024 returns you will pay the 6% excess on the 2022 + 2023 excess amount.

Please see How do I amend my federal tax return for a prior year?

Yes, you can file the 2024 before finishing the amended return. To pay the 6% penalty on your 2024 return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select "Traditional IRA" and “Roth IRA”
4. Enter traditional IRA contributions and continue through the screens
5. Enter Roth IRA contributions 
6. On the "Do you have any Excess Roth Contributions" answer "Yes"
7. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022 and 2023.

[xT_Tx]

Thank you @DanaB27 for the detailed reply! I was drafting an update to my situation and saw you replied to my OG post so that answered some of the questions I was about to post. But here's the tricky part. I have my Roth IRA with CalSavers and they're no help at giving me the IRA balances I need to calculate the NIA, nor would they calculate it for me. I basically looked at my statements and backtracked the date/amount of contributions and change in value at the beginning/end of each quarter to find the earnings and the balances after each contribution. I found that the excess contribution started on the 6th contribution I made on 3/18/2024. So the 20 contributions I made since 3/18/2024 in the amount of $171.08 totaling $3,421.60, are excess. The total IRA contributions from both accounts would be under the max of $7,000 - $3,421.60 = $6,836.85. My next Roth contribution of $171.08 would push me over the limit. 

I did the math for the CalSavers excess removal worksheet and it's as follows:

Excess contribution for 2024: $3,421.60

Total Earnings Calculation:
$13,246.28 (IRA balance prior to withdrawal 2/20/2025)
+ $0 (Withdrawals taken before excess removal)
- $7,635.36 (IRA balance prior to excess contrib)
- $4,003.77 (Excess contributions $3,421.60 plus subsequent contributions $174.65 + $174.65 + $232.87 made in 2025 for 2025 before excess removal)
- $0 (Time deposit or other investment penalties applied to excess removal)
= $1,607.15

Adj Opening Balance: ($7,635.36 + $4,003.77) = $11,639.13

NIA: ($3,421.60 excess * $1,607.15 earnings) / $11,639.13 adj opening bal) = $472.46

Withdrawal Amount: $3,421.60 excess + $472.46 NIA = $3,894.06

But according to IRS, the formula provided gave me a different withdrawal amount. From IRS, "If you need to determine the applicable net income you need to withdraw, you can use the same method that was used on Worksheet 1-3."

1 Excess contributions: $3,421.60
2 FMV ending bal prior to withdrawal: $13,246.28
3 FMV prior excess to excess contrib: $7,635.36
4 Minus 3 from 2: $5,610.92
5 Divide 4 by 3: 0.734
6 Multiply 1 by 5: $2,511.45
7 Add 1 & 6: $5,933.05 (This is the amount of the IRA contribution plus the net income attributable to be withdrawn).

Does the calculations look right? Which withdrawal method do you suggest I follow?

Regarding federal and state tax withholdings, is it recommended to indicate that on the withdrawal form? What's the guideline on that? My Federal income tax rate is 22% and my CA income tax rate is 9.3% for married filing jointly. 

[xT_Tx]

Accidentally posted twice. I don't see a delete post, so I'm just editing this message to be dismissed.

[DanaB27]

You would use the calculation from Worksheet 1-3 which is similar to Worksheet 1-4. Determining the Amount of Net Income Due to an IRA Contribution and Total Amount To B.... 

Please note  #3 has to be the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA. Therefore, this should be $7,635.36 plus the contributions.

Generally it is not needed to withhold taxes when returning the 2024 excess contribution plus earnings in 2025 since the withheld taxes would be applied to 2025 and not to 2024 when the earnings are taxable.

[xT_Tx]

OMG thank you so much @DanaB27 !! You are a life saver! 🤗  I redid the calculation for #3 and both methods match!! 🙌  I am so relieved to finally get the numbers correct. 

Since I don't need to withhold taxes for 2024 excess contribution plus earnings, the same goes for 2022 and 2023 excess contributions right? 

[DanaB27]

The return of the excess Roth IRA contribution without earnings after the due date won't be taxable since you are withdrawing a contribution. Therefore, you don't need to withhold taxes.

Next year on your 2025 return to report the Form 1099-R for the withdraw of the 2022 and 2023 excess:

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
5. Answer "Owned Any Roth IRA for Five Years?" screen
6. Continue through the questions and make sure you enter the net contributions prior to 2025 on the "Enter Prior Year Roth IRA Contributions" screen (include the 2022 and 2023 excess but not the 2024 excess)

This will resolve the excess contribution and you will no longer have the 6% penalty on your return.

[xT_Tx]

Sounds great. Thanks @DanaB27 . 

As I'm entering IRA info, I came across an error.

IRA Contributions Worksheet: Line 26 - Taxpayer's excess Roth IRA contribution credit should be equal to $163, the Roth IRA contribution credit from Form 5329, Part IV. 

Xs Roth IRA cont cred (T): __________

What is this credit? Why is there a credit? From what I gathered by looking at the forms, I contributed $6000 to traditional IRA so I have $1000 left to reach the max $7000. I entered $837 as my Roth contribution for 2024 and that's where the $163 came from. But I don't understand why there needs to be a credit listed. 

[DanaB27]

You can apply $163 of your previous excess towards your 2024 contributions since your total contributions were less than $7,000. This will be listed as the excess Roth IRA contribution credit on line 26 of the IRA Contributions Worksheet. Please go back to the IRA contribution interview to apply the $163 to 2024:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Continue through the questions
4. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022 and 2023.
5. On the "How Much Excess to 2024?" screen enter $163 to apply to 2024.

Note, the amount you need to withdraw as regular distribution for the 2022 and 2023 excess is reduced. You can see the amount on line 24 of Form 5329.