Roth IRA Contributions Both In Excess and Phased Out

[DMS3470]

I have made a $6,000 contribution to a self-directed Roth IRA. This contribution is for 2022. It is over the yearly limit (I had previously made a $6,000 contribution via a backdoor IRA to a separate IRA account). I will also be phased out completely for 2022 based on income. 

There is currently a small gain on the contribution.

This is my first contribution to this specific Roth IRA.

What is the penalty for both overcontributing and contributing when phased out?

How can the penalty be avoided?

[KochuK · Accepted solution]

Hi DMS3470,

Assume you are under age 50 and has an income level that you are not eligible for a direct Roth IRA contribution, so you did a "backdoor Roth" for tax year 2022.

A Backdoor Roth is to contribute $6,000 to a Traditional IRA as a nondeductible contribution, then converted it to an Roth IRA account. The limit for any IRA related contribution is $6,000 ($7,000 if you age 50 or older).

Therefore, the $6,000 to an self-directed Roth IRA is excess contribution for tax year 2022. Below is what IRS Pub 590-A, page 42 says:

Quote

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

Unquote

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Therefore, you need to withdraw $6,000 + earnings before April 2023 to avoid 6% additional tax on Form 5329, Part IV.

https://www.irs.gov/pub/irs-pdf/f5329.pdf

Hope the above helps.