Return of excess contributions keeps raising MAGI

[TardyTax]

In 2023 I overcontributed my Roth IRA by $1,190. To rectify this, I asked my provider to return the excess contribution along with $170 worth of gains.

Now from what I understand, earnings such as these need to be included in your taxable income for the year the excess contribution was made. If I add the $170 income to my 2023 return, my MAGI increases and my Roth contribution limit is further reduced - creating a situation where I'm still overcontributed.

How do I get to that magic number where I withdraw just enough to get under the contribution limit, but not too much to the point that my MAGI goes up and further reduces my allowable limit? It's like a vicious cycle that's giving me quite the headache!

[dmertz · Accepted solution]

This is a common problem when your MAGI falls in the phase-out range and your excess contribution gained value.  It's easier to either go through the iterative cycle, do a binary search or use the Newton-Raphson method to determine the necessary amount (before making next request for return of contribution)  than to try to derive the formula (which involves an infinite series) to do it in once pass.

An alternative is to leave the remaining excess in, pay the 6% on that, then after October 15 but before the end of the year make a regular distribution of just the amount of the excess with no adjustment for investment gains.