Backdoor Roth if you have multiple IRA

[rrk_ms_bharat]

I have been contributing excess amount to Vanguard Roth IRA for 2021, 22, 23 & 24. When I found out in 2024, I moved money into Vanguard IRA for 2023 and 2024. Vanguard told me I cannot do backdoor Roth IRA because I have another IRA in Fidelity

1. Is it correct?

2. Now in 2025 when I am doing turbo tax , it is charging me penalty for excess IRA contribution and asking me to withdraw money. Where do I move the money ???...to Roth or simply my Savings?

Please help with questions above

[DaveF1006]

Yes, Vanguard is likely correct in this case. A backdoor Roth IRA involves making a nondeductible contribution to a traditional IRA and then converting it to a Roth IRA. However, the IRS applies the "pro-rata rule" during the conversion. This rule considers all your Traditional IRAs, regardless of where they're held (e.g., Vanguard, Fidelity). If you have money in your Traditional, SEP, or SIMPLE IRA before taxes, the rule will make some of the money taxable. This makes a backdoor Roth IRA less effective if you already have pre-tax IRA balances (like the one in Fidelity).

When withdrawing excess contributions, the key is to remove the funds from your IRA accounts entirely to resolve the issue. Here's what you can do:

1. Withdraw to a savings or checking account:
2. Move the excess contributions (and any earnings generated from them) to a non-retirement account, like your savings or checking account.
3. Moving the money into a Roth IRA doesn’t fix the problem, as the original excess contribution must be corrected.

This withdrawal will need to be done before April 15.

[rrk_ms_bharat]

Thanks @DaveF1006  for your answer.

Follow-up Question:

1. How can I inform IRS not to charge any more penalty ( after I transfer money to Saving/ Checking before  April 15)… implying are there any forms which need to be filled out?

2.  What ever you mention for 1, How can I do that in Turbo Tax ? ... Please give detailed steps

[DawnC]

To steer clear of the 6% tax, file a withdrawal request. Contact your financial institution and request to withdraw the excess contribution, plus earnings, by the due date of the return (including extensions).    After you do that and have the amounts, you can report those amounts on this tax return before you file.   That will stop any penalties.   

The earnings are included as taxable income for the year the excess contribution was made.   

[rrk_ms_bharat]

After removing excess contribution from Vanguard 'Traditional IRA' to savings account (non-retirement), It was said above that I have to pay taxes on 'Earnings' which is fine.

1. Do I have to pay taxes on the original contribution in 2024 (From Roth IRA to traditional IRA) ? There is no additional contribution

2. If I remove excess contribution, will Vangurad give their 1099 in 2025 or 2026?

[RobertB4444]

You're going to create a substitute 1099-R.  Go to the retirement income section and click start next to the 1099-R entry.  Check the box that says "I need to create a substitute 1099-R".  Then enter the information about Vanguard and put the entire amount that you took back out into box 1.  In box 2a put just the earnings from the amount.  Then in box 7 enter code 8 (for corrective refunds).

This will make the earnings taxable this year.  In 2026 you will receive a 1099-R from Vanguard that will look exactly like this and will be marked 2025.  When you receive it you will ignore it because you already entered it on your 2024 taxes.  Entering it this way avoids penalties.

@rrk_ms_bharat