Calculating Roth IRA Overcontribution

[taxes4739]

I realized that I overcontributed to a Roth IRA this year. As it is still before the filing deadline, I will now withdraw the overcontribution amount (plus earnings).

Part 1: Regarding the "...plus earnings," my account balance is actually at a loss, so I'm trying to determine how much I actually need to withdraw. Easiest to discuss with some hypothetical numbers:

* Let's say the account balance was $10,000 prior to this year's (over-)contribution.

* Then I contribute $6000 this year, bringing the balance to $16,000

* I now realize that I was only eligible to contribute $4000 (so $2000 was an overcontribution)

* Today, the account balance is $15,000 (aka it has lost $1000 in overall value since the contribution)

* How much do I need to withdraw?

It seems most logical to me that it would just be: ($16,000-15,000)/16,000=6.25% loss. Thus I withdraw (1-.0625)*$2000=$1875? Or maybe the IRS still requires you to withdraw the full $2000? Or maybe they require something more convoluted, like any dividends are "earnings" regardless of the total balance, etc?

Part 2: Once I've determined & withdrawn the proper amount, do I need to do anything special in TurboTax? Or I simply fill it in as if I originally contributed the proper amount, & I don't have to do any extra paperwork?

Thanks in advance

[fanfare]

when your contribution is losing money, you must request and report the withdrawal of the contribution that is in excess.

you will in fact get back less money if your allocated earnings are negative.

This is the simpler situation to handle because your MAGI will not increase.

@taxes4739 

[taxes4739]

Thanks for the quick response - however, I'm still not clear on precisely how to proceed. How do I calculate the proper amount to withdraw (i.e. per the example above)? How do I report it?

[taxes4739]

Nevermind, found the answer.

How to calculate is explained here: https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning...

How to report is explained here: https://ttlc.intuit.com/community/taxes/discussion/overcontributed-to-roth-ira-in-2020-withdrew-exce...

[fanfare]

the proper amount to withdraw is the amount of the excess.

you ask the custodian to do the calculation of earnings. using their "removal of excess plus earnings" form.

the proper amount to enter  as withdrawn into TurboTax,if asked, when you have a loss is the amount of the excess.

the proper amount to report on your tax return If you want the retirement savings contribution credit, is your reduced contribution amount that is no longer in excess.

Here, I'm just rephrasing what I stated above.

@taxes4739 

[fanfare]

Is is not recommended to bypass the custodian and try to calculate the earnings yourself.

You will not get the correct 1099-R document.

@taxes4739 

[taxes4739]

> you ask the custodian to do the calculation of earnings. using their "removal of excess plus earnings" form.

Thanks - I didn't know there was a specific form for this, and that the brokerage just calculates it for me (I thought I had to calculate it myself and manually withdraw). I got the form & did it that way - much easier!

> the proper amount to enter as withdrawn into TurboTax, if asked, when you have a loss is the amount of the excess.

In TurboTax, the screen looks like this: https://jiij.cc/snaps/2023-04-14_11.37.41.png .

For some easy numbers, let's just say my excess contribution was $1000 and the earnings/loss was -$100 (aka $100 loss). So my brokerage would withdraw $900. The correct value to enter on the page shown in the screenshot would be $1000 in this example, not the $900, correct?

> the proper amount to report on your tax return If you want the retirement savings contribution credit, is your reduced contribution amount that is no longer in excess.

I'm not understanding this final sentence. Is this just rephrasing "the proper amount to enter as withdrawn into TurboTax, if asked, when you have a loss is the amount of the excess"? So again, I only enter then $1000 (and this is not being presented as an alternative option "if I want (some) credit"?)

[taxes4739]

Edit: I found the answer, I would enter $1000 on that screen.