How to fix the MAGI amount used in the Roth IRA contribution limit worksheet

[ANX]

When I tried to file my 2023 tax return, I realized I had overcontributed to my Roth IRA based on my MAGI. I filed an extension and withdrew the excess contribution of $3,910 along with the associated gains. I calculated the excess contribution based on my MAGI and determined the gains that were attributable to this excess. Since these gains are reportable income for 2023, but I won't receive the 1099-R until 2025, I followed the advice from the TurboTax experts and manually inputted a 1099-R form. I entered the gross distribution and taxable income (the gains), and used codes J and P for box 7.

There was a question asking, "Did you use your IRA to pay for any of these expenses?" I was instructed to fill out "corrective distributions made before the due date of the return." My question is whether this should be the gross distribution amount or just the gains, excluding the excess contribution.

After filling out the 1099-R form, the gains were included in my income, which flowed into line 4b of the 1099 form, thereby increasing my original AGI and affecting the calculation of my MAGI. Consequently, the Roth IRA contribution limit worksheet used this new MAGI (which includes the gains) to calculate my Roth IRA contribution limit. This resulted in a limit of 0, meaning I could not contribute any amount. However, based on my original MAGI, I calculated that I was allowed to contribute $2,590. Now, TurboTax is treating the $2,590 as an excess contribution and is applying the 6% excise tax, making the worksheet incorrect.

Can someone advise on how to fix this issue?

[fanfare]

Because of this behavior of the tax code.

when trying to remove the disallowed part of a contribution with earnings, you must also include an adjustment > 0 because otherwise your new MAGI will leave you still ineligible for some of the remaining contribution.

In your case, the allocable earning must be non-trivial.

@ANX 

[fanfare]

If you timely filed for an extension on your 2023 tax return (or timely filed the 1040 itself),

you still have until Oct 15 to properly correct an excess contribution and avoid a 6% penalty.

@ANX 

[fanfare]

If your earnings are substantial (more that 6%) you can pay the 6% penalty and hold off until after the due date with extenstion (Oct 15) .

After that date, only the contribution is removed, Earnings remain in the Roth IRA

If the earnings are more than substantial, you can leave the excess to continue to compound indefinitely.

You will pay 6% on the original excess each year.

@ANX