Roth IRA excess contributions - how to handle now (Dec 2024)

[john307sf]

Hello all! I’d appreciate some advice on how to handle a Roth IRA excess contribution issue from 2021:

2021: Contributed $6,000 to a Webull Roth IRA, but income was above the limit (filed as Married Filing Separately with income over $10,000). What to do now with the $6,000 excess?
2022: Contributed $6,000 to the same Webull Roth IRA (eligible this year, no issues).
2023: Contributed $6,500 to a Vanguard Roth IRA (eligible this year, no issues).
2024: Contributed $7,000 to the same Vanguard Roth IRA using the backdoor method (no issues).

I plan to remove the $6,000 excess contribution from 2021 now (2024).

Current balance of my Webull Roth IRA account: approximately $13,500, with around $1,500 in capital gains/earnings.

Questions:

• How can I resolve these errors?
• Do I need to calculate and withdraw the Net Income Attributable (NIA), or can I remove just the $6,000?
• Will I be subject to any excise tax for the excess contribution, and if so, how can I resolve that?

Additional info: I don't have any Traditional IRA or 401(k) plans (all $0).

Many thanks in advance for your assistance!

[dmertz · Accepted solution]

As you propose, to correct the excess Roth IRA contribution from 2021 and avoid a penalty for 2024, you must before the end of 2024 (completed today or tomorrow) obtain a regular distribution from your Roth IRA(s) of exactly $6,000, no adjustment for investment gain or loss.  Tell the Roth IRA custodian nothing about this distribution being to correct an excess contribution.  This distribution will be a nontaxable distribution of contribution basis reported on your 2024 tax return.

With regard to penalties, you owe a 6%, $360 penalty for each year 2021, 2022 and 2023 (and 2024 if you fail to obtain the corrective distribution in the next two days).  You'll pay these along with filing 2021, 2022 and 2023 Forms 5329.

An alternative to having the 2021 contribution be an excess contribution might be to amend 2021 to Married Filing Jointly.  You have until April 15, 2025 to do that, if it makes sense.

[john307sf]

Thank you for your guidance; I truly appreciate it.

Regarding the timing, I was under the impression that I had until April 15th, 2025, to withdraw $6,000 for the 2024 tax year to avoid the excise tax for 2024.

Is that not applicable in this situation?

[dmertz]

The due date of your 2024 tax return, including extensions, would be the deadline to obtain a return of a contribution made for 2024.  To have obtained such a return of of the 2021 excess contribution it would have to have been obtained by the due date, including extensions, of your 2021 tax return.  Since we are well past that deadline with respect to an excess contribution made fore 2021, the corrective distribution must be made by year-end.  Only if it is completed by the end of 2024 can it appear on line 20 of your 2024 Form 5329 to reduce the excess carried in from 2023.  Without that, the penalty is not eliminated for 2024.

[john307sf]

Thank you again @dmertz  for your guidance—it’s been incredibly helpful.

I have a few follow-up questions about the withdrawal process (screenshot attached):

1. Federal Income Tax Withholding: Webull defaulted to a 10% rate. Should I set this to 0%, given that this withdrawal is to correct an excess contribution?
2. Distribution Reason: The only option is “Early Distribution (Under Age 59½).” Will this cause issues when reporting on my tax return?
3. Residency Change: I was an Ohio resident in 2021 but have been a California resident since 2023. Does this affect the tax treatment of the withdrawal?

Any additional advice to ensure this is processed correctly would be greatly appreciated.

John

[dmertz]

1.  The $6,000 distribution from your Roth IRA will not add to taxable income because it is a distribution of contribution basis, determined on Part III of Form 8606.  Whether or not you should have taxes withhold depends on whether or not your tax withholding from other sources is sufficient to cover your tax liability from your taxable income.  On your tax return, tax withholding is applied to your overall tax liability, not to any particular income item.  If you don't need to generate additional tax withholding, you can request that no taxes be withheld.  The options are generally 0%, 10%, or more than 10%.

2.  Early distribution is the correct selection.  The distribution will not be subject to the 10% penalty because only taxable distributions are subject to this penalty.

3.  This has no effect on your state tax returns.  Because the distribution is not included in federal taxable income, it won't be included in your state (California) taxable income.