Ineligible 2024 Roth IRA Contribution - How are earnings treated?

[CJB-1959]

I made a $8000 2024 Roth IRA Contribution in February 2024. Because I had no earned income last year, I learned in January 2025 that I was ineligible for the Roth IRA contribution. I reversed the contribution on January 17, 2025.

As a result, I earned about $1400 while the dollars were in the Roth Account. These dollars were returned to me in January 2025. Should the $1400 in earnings be treated as income for the 2024 or 2025 tax year? 

Note: The initial $8000 dollars came from taxable brokerage account. 

[MinhT1]

The earnings from the excess contributions have to be reported and taxed in 2024.

On your 2024 tax return, you do not report the excess contribution as it has been withdrawn.

To report the return of excess contributions and earnings, you would create a 2025 form 1099-R with the total distribution (excess plus earnings) in box 1, the earnings in box 2a and code PJ in box 7. You then enter this 1099-R on your tax return, and the earnings will be taxed. When entering this form 1099-R, make sure to indicate that the year on the form is 2025, as this is a replica of the form you will receive for year 2025 in 2026.

When you receive the 2025 form 1099-R with code PJ in box 7 (in 2026) for this withdrawal, there is no further action needed.