Withdrawing roth ira excess contribution for both years - what to do?

[sclam2023]

Hi, I would like to withdraw the excess contribution of 2022 Roth IRA. It could be quite straightforward. However, without realizing my 2022 income exceeding the threshold for the Roth IRA, I already started my 2023 Roth IRA contribution early in Jan 2023. So I'm facing a situation that I need to withdraw my 2022 excess contribution, but also my 2023 contribution because my income will likely disqualify me from contributing 2023 Roth IRA.

I'm not sure the right way to withdraw the amount. Is there an order of doing it? For example, do I need to withdraw my 2023 Roth contribution (even though the tax year will be next year) before I withdraw my 2022 Roth excess contribution? I hope to withdraw both my 2022 and 2023 contributions at once if possible.

The reason I'm asking is because things got confusing to me when I calculated NIA.

Based on the formula that IRS provided, my recent 2023 Roth contribution could result in a net gain (+NIA) but my 2022 Roth contribution had a net loss (-NIA). Meanwhile, my current Roth account has a loss overall because the 2022 net loss is larger than the net gain generated by 2023. If that's the case, do I need to pay tax on the net gain from 2023 next year? Note that if I'm withdrawing both 2022 and 2023 contribution together, it's still a loss overall.

Last question, if I keep my 2023 contribution in the Roth now, and just withdraw 2022 excess contribution to avoid penalty for the tax year. When calculating the withdrawal, should I include 2023 contribution in the the Adjusted opening balance? The reason I asked because the Adjusted closing balance included the contribution and earning from 2023 as of today. I appreciate your time reading this.

[Cynthiad66]

You should withdraw your 2022 first as the deadline is approaching.  2023 is a possibility that you will need to do the same thing.

Use this link for information on how to handle the NIAs.  NIA Calculations and How to Handle them

For your last question, if you are definitely withdrawing 2023 contribution then make the adjustments for your calculations.  If you are leaving it in there a while then report actual amounts.

You won't face any penalties if you simply withdraw your excess contribution—plus any income it has earned in the meantime—by the due date for your tax return, including extensions.  

 Since you have established that you have excess Roth contribution, you’ll be subject to a 6% tax penalty on the excess amount for every year that it stays in the account.

You can either accept this 6% penalty or take measures to avoid it before the tax filing deadline (this includes any filing extensions you may have).

If you choose to pay the penalty, you then have two options:

• Apply the excess to next year: You can leave the excess contribution in the Roth IRA and apply it to next year’s contribution. Be sure to take this into account when determining your contribution amounts for next year
• Remove only the excess contribution after your tax deadline: After you file, you can request a regular distribution to remove the excess contribution (without earnings) between October 17 and December 31, 2023. You’ll have the 6% excess contribution penalty on the 2021 return, but you can keep the earnings in the Roth account, and can avoid the penalty on next year’s tax return

If you’d rather avoid the penalty, you have two options (both must be completed before your tax filing deadline):

• Withdraw the excess contribution plus earnings: Keep in mind that the earnings are included in your taxable income for the year the excess contribution was made, so you’ll still receive a 1099-R to report these earnings on your tax return
• Recharacterize the Roth IRA contribution as a traditional IRA contribution: Contact your plan administrator for guidance on this process. After you’ve made your recharacterization, see these instructions for how to record this process in TurboTax

Check the Roth IRA contribution limits for 2022 and 2023 to avoid future excess contributions based on your filing status and MAGI.

Contributions to IRA Accounts

@sclam2023