Excess IRA Contribution

[mattslegacy]

Hello, I made a dumb mistake and contributed $7K to my IRA in 2020 (I'm under 50), so 6K is my limit. I understand it's excess, and there are options. Where it messy, is I always do Roth IRA conversions. So:

Every month I deposit $200 into my Vanguard Traditional IRA. I wait a few days until it clears, and then convert it to Roth. That's $2,400/year. In 2020 I decided to max it out and made a 1-time deposit of $4,600 in the Spring, and converted it. Obviously this math mistake put me at $7K.

How can I fix this? It's so much stickier with the conversions. 😩

[jc_penny]

Hope this becomes an active thread...  

Here's my unsanctioned thoughts:

1)  I'm not sure why you go through the trouble of making a tax-deferred IRA contribution only to immediately follow up with a taxed withdrawal for ROTH deposit.  I'm curious what loop(hole) you're jumping through for this 'booking' activity.

2)  As for the excess, simply withdraw the excess before your taxes are due and before filing your return.  TT should have a menu taking you through the recording of the transaction resulting in a Form ?5329? .

3)  And since compounded investment gains and taxes are multipliers following the commutative property of multiplication any tax-deferred investment merely pushes the income to a future tax-bracket and nothing else.  Therefore, there should be little concern regarding any "gains" that may have been earned while the excess was in the IRA.

[mattslegacy]

What a quick reply Jenny!

1) I earn too much to simply make a Roth Contribution, so I do the Backdoor Roth Method. It's some extra legwork, but it's worth it.

2) Withdrawing also seems to me to be the best course.

3) I'm a little lost here, your knowledge is deeper than mine. I guess my concern is 1, having to pay the 10% penalty for withdrawing under 59 1/2, and 2, how I could calculate the exact number of gains I'd need to pull.

[jc_penny]

3) This comment was referencing the false conclusion that tax-deferred does anything but push income to future tax brackets.  A X B X C = A X C X B.  It's a math thang.  Some might be tempted to compute a pro-rata share of gains while in tax-deferred status.  The point is not to try to figure it out.  Excess in equals excess out.

2) Tidy accounts pay dividends of their own.

1) OK  I get it.  Good plan.

[mattslegacy]

Thank you for all the good advice!