Roth excess contribution 2025 -- Now that I withdrew my excess, is my allowed partial contribution less due to gains?

[crds_31]

While filling out my 2025 taxes, I received a the following notice:

Because you made an excess contribution of $3850 to your Roth IRA, you will owe a penalty each year the excess remains in the IRA. 

But don't worry. You can remove the penalty by taking action before April 15, 2026 (or October 15, 2026, if you're filing an extension. 

Before the tax deadline, I went ahead and did a return of excess of $3850 plus $1476.79 gains but left $1650 as with my Adjusted Gross Income at that point, I was able to do a partial contribution of that amount.

Once I added the gains to my taxes by completing the steps of the discussion shared below, I realized my Adjusted Gross Income is $1477 higher (amount of gains from my return of excess) which I am assuming it means my allotted partial contribution is less now. I am now getting ready to do another return of excess due to this.  At this point, I am thinking of just removing the remaining $1650 as I do not want to continue having this issue. 

Could you please confirm that it is correct to do another return of excess, as the gains I got from my initial return of excess increase my income and thus decrease the amount I can partially contribute?

Once I complete the second return of excess, should I just add another 1099-R? Or add both return of excess amount and gains into one 1099-R?

What are the benefits/cons of adding the 1099-R now vs waiting until we actually receive the 1099-R in beginning of 2027?

https://ttlc.intuit.com/community/retirement/discussion/roth-excess-contribution-2025-removed-but-ho...

[ReneV4]

Yes. Removing the remaining $1,650 is the way to go. You will also need to take out any earnings associated with the $1,650.

Since you are doing these before filing your 2025 return, you should combine both into one substitute 1099-R. Note: The brokerage may send you one 1099-R, or one for each request next year.

The pros of adding a 1099-R are that you will avoid having to amend your return next year to settle the tax bill. The con is that you have no 1099-R so you have to manually do the math to make the entries.

The pros of waiting are you avoid doing the math by waiting for the brokerage to send you the 1099-R. The con is that you will have to amend your 2025 tax return later because the earnings are legally required to be reported in 2025.

[fanfare]

when you are allowed a phased out contribution amount,

taking exactly the excess does not work if earnings are positive because it raises your MAGI for Roth purposes.

The simplest solution is to pay the penalty, which is now  much reduced.

After the due date plus extensions for the year of contribution,

you don't have to calculate earnings any more; allocable earning stay in the Roth.

you take out the exact excess, or offset it with an allowed contribution, to eliminate the yearly penalty

See Form 5329.

@crds_31