2021 Excess Roth IRA Contribution Questions

[naviator2003]

Hello all! I contributed $2,000 to my Roth IRA, oh which, all had to be removed when I altered my tax plan for 2021 (income too high). I removed all contributions, and earnings, for 2021 by Nov of 2021. By doing this, I know I will avoid the 6% penalty. However, I do have some other questions:

1. Since I removed the contributions and earnings before the tax filing deadline, am I required to pay the additional 10% tax?

2. If the answer to question 1 is "Yes", do I only have to pay it for 2021 (meaning, I don't have to pay it year after year like the 6% penalty if you leave the excess in the account)?

3. Is there any way to avoid the 10% additional tax?

4. Could a recharacterization/conversion from the Roth IRA into a Traditional IRA avoid the additional tax?

Thanks, in advance!

[ErnieS0]

No, you do not have to pay the 6% excess contribution penalty because you removed the excess and earning by the due date of your individual income tax return (including extensions).

A recharacterization into a Traditional IRA would avoid the tax. A conversion is converting a Traditional IRA into a Roth.

Retirement Topics - IRA Contribution Limits

[naviator2003]

@ErnieS0 Thanks for the response, but how about my first three questions?

[dmertz]

1, 2 and 3.  If you are under age 59½, you'll have a 10% early-distribution penalty on gains included with the returned $2,000.  The gains are shown in box 2a of the code J8 2021 Form 1099-R.  If you were over age 59½ at the time of the return of contribution, you'll need to claim an Other reason to the early-distribution penalty that the code J otherwise indicates.

4.  You can't recharacterize what has already been distributed as a return of contribution.  You can make a new contribution to a traditional IRA since the return of contribution makes it as if you had never contributed the $2,000 to the Roth IRA.