Overcontribution to traditional IRA which has been rolled over to Roth IRA

[claireliuqqqq]

I realized I have overcontributted to my traditional IRA account - I've contributed $7500 in 2023 for 2023 and $1000 in 2024 for 2023 while the limit is $6500. What makes it worse is that I've already converted all the contributions to Roth IRA and there's no fund in my traditional IRA account.

I know I have to take the excess amount and any earnings out to avoid penalty. But should I directly take them out from my Roth IRA account? Or should I convert the excess amount + earnings from Roth IRA back to traditional IRA, then take the amount our from the traditional IRA account? How should I report such transactions on turbotax?

Thanks so much for the help in advance!

[DanaB27]

You cannot undo a conversion to Roth IRA. Therefore, you will need to take the excess contribution plus earnings out of the Roth IRA.

 To clarify, you made the conversion in 2024? If yes then entering this in TurboTax will be difficult since when you enter the nondeductible traditional IRA contribution to get the basis on Form 8606 TurboTax will calculate the 6% penalty. But if you don't enter the nondeductible traditional IRA contribution then TurboTax will not create Form 8606.

[claireliuqqqq]

I made $7500 conversion in 2023 and $1000 conversion in 2024.

So if I take the excess amount out of my Roth IRA account, should I specify to take $2000 out from the amount converted in 2023? Then how should I report this in my 2023 return on turbotax? I think I will only receive a 1099R next year from the brokerage regarding this distribution.

[DanaB27]

Yes, and you should get two 2024 Form 1099-R for the withdrawal of excess contributions plus earnings since, generally, the financial institutions will use this rule:
 
 • If you made the excess Roth IRA contribution in 2024 for 2023 and then withdrew in 2024 then you will have code 8 and J on your 2024 Form 1099-R, and it will have to be reported on your 2024 tax return.
 • If you made the excess Roth IRA contribution in 2023 for 2023 and then withdrew in 2024 then you will have code P and J on your 2024 Form 1099-R, and it will have to be reported on your 2023 tax return.

You should check with your financial institution if they will follow this rule. Or you could wait until next year when you receive the 2024 Form 1099-R and then amend the 2023 return if necessary.

 
If you enter the nondeductible contributions then TurboTax will ask for the value of your traditional IRAs on December 31, 2023 (including 2023 contributions made in 2024). Since you converted the $7,500 in 2023, this would be $1,000 and TurboTax will calculate the 6% penalty on this. The 6% penalty is calculated on the lower of the excess contribution or the value of your traditional IRAs on December 31, 2023 (including 2023 contributions made in 2024).  If you do not enter the nondeductible IRA contribution then TurboTax will not create Form 8606.

[claireliuqqqq]

You mentioned "excess Roth IRA contribution", does this mean though the contribution was first made to traditional IRA account, but since it's converted to Roth IRA, now I should consider all the contribution as Roth IRA contribution?

If the brokerage helped me to take out $2000 + earnings from the contribution I made in 2023, then when I do my 2023 return, can I just file as if I didn't make the excess contribution ($5500 contributed in 2023 for 2023 and converted to Roth IRA,  $1000 contributed in 2024 for 2023)? Then I also don't need to do a 2023 amendment next year.

With regard to "nondeductible contributions", I think I have to report since I cannot deduct from these contributions. But my understanding for the penalty is that as long as I take the excess amount out before tax deadline, there won't be any penalty. Then why does Turbotax still calculate the penalty? Is my understanding wrong?

[fanfare]

Do you have earnings to allow Traditional  IRA contributions ( not over the max ) for 2023 or 2024?

If yes, you don't have to withdraw any money.

use the alllowed contribution to offest the excess.

there may be a small penalty but your tax--favored accounts are not harshly disrupted.

financial institution is not involved.

Learn this option before submitting any requests to the financial institution.

@claireliuqqqq 

[fanfare]

Note: to remove 2023 excess plus earnings after the due date (April 15) 

You must have A) filed Form 1040 by tax day, or B) requested an extension of time to file by tax day to take advantage of the  "including extensions" rule, giving you an Oct 15 deadline.

@claireliuqqqq 

If you remove after filing, you may have to amend.