Excess contribution to Roth IRA because of Earned Income Credit?

[gumibear]

Hi,

I made $1534 doing freelance work in 2023 and I assumed I could contribute all of it into my roth IRA.

Turbotax is telling me now that I had an excessive contribution of $109.   

This amount happens to be the same as the Earned Income Credit, so I think it’s what’s causing the discrepancy.

Ideally, I would like to just opt out of this credit so there’s no excess contribution but after a quick google search, it doesn’t seem like this is an option.

Am i seeing the problem correctly and if so, do I have any options to avoid the hassle of withdrawing the excess contribution?

I lost a ton of money this year in my account day trading, so I did not make any earnings, so do I just withdraw the $109 and file the form 1099-R in the tax year 2024?  Turbotax software says the easiest thing to do is file the form 1099-R in the tax year 2023, but I’m concerned I wont get the form in time before April 15th.

Thanks

[ThomasM125 · Accepted solution]

If you have an allowable ROTH IRA contribution next year, you can apply your overpayment to that and that will correct the matter for next year and going forward. Otherwise, you could leave it in there and pay the minimal penalty each year until it is corrected. 

If you want to correct it by taking a distribution before April 15, the easiest thing to do would be to enter a substitute Form 1099-R in TurboTax for 2023 as opposed to amending your 2023 return later.

To enter a refund of excess IRA contributions in the current year follow these steps:

1. Go to the personal income section of TurboTax 
2. Find the Retirement Plans and Social Security menu option
3. Start or Update IRA, 401(k), Pension Plan Withdrawals (1099-R)
4. Choose Add Another 1099-R
5. Choose I'll type it in myself
6. On the screen that says Tell Us Which 1099-R You Have choose I need to prepare a Substitute 1099-R
7. Enter the distribution amount in box 1 of the substitute 1099-R
8. Enter the earnings in box 2(a)
9. Enter code "P" and "J" in box 7 
10. When asked about the year on the form 1099-R, say it is for the year following the year you are working on