ROTH IRA contribution , penalty and options

[vze56v6x]

Hi,

I was laid off in mid-2024 and only contributed to a 401(k) for the first six months of the year. I didn’t have access to a 401(k) for the remainder of the year. When calculating my Modified Adjusted Gross Income (MAGI), I initially thought I would be under the $240K limit for a married couple filing jointly, so in December 2024, I opened a Roth IRA and contributed $2,400. I did this because I was saving money separately, and I mistakenly thought a Roth IRA was a good option.

As of my January 2025 statement, the account has only earned 8 cents in interest—so there’s very little growth.

Now that I’m doing my taxes, I see that my MAGI is actually $254K, meaning I exceeded the contribution limit and am now facing a penalty.

TurboTax is giving me some options to avoid the penalty. One option (Option 2) seems to suggest that I can withdraw the full $2,400 from my Roth IRA and essentially close the account since I don’t qualify to contribute. Does this mean I can remove the entire amount as if I never opened the account and avoid the penalty?

The current penalty is about $150, but I’m more concerned that I’ll continue to be penalized every year. I’d rather close the account now if that’s an option.

Can you clarify if withdrawing the full amount will allow me to avoid ongoing penalties?

Thanks!

Turbo Tax Options Suggested

1. Pay the penalty for an excess contribution. You'll need to pay a 6% penalty each year that the excess remains in your Roth plan. If a Roth IRA contribution is allowed next year (or any future year), excess contributions can be applied up to the contribution limit for that year and no longer subject to the penalty.
   
   2. Withdraw the excess (including any money you earned on it) before the filing deadline for your tax return. If you do this, you'll need to correct the amount you entered in TurboTax as your contribution.
   
   3. Recharacterize your Roth IRA contribution to be a traditional IRA contribution. That means that you instruct the account trustee to move the money to a traditional IRA and treat it as if that's where you made the original contribution.

Of course, if you haven't yet made your 2024 contribution (you have until the due date of your return, including extensions, to make IRA contributions) you can avoid this situation by simply not making the contribution.

[MinhT1]

If you choose the option to withdraw the excess contribution and avoid the excise tax penalty, then this is how you'll proceed. There will be no penalty in 2024 or in future years.

If you withdrew your 2024 excess contribution to your Roth IRA before the due date of the 2024 tax return (April 15, 2025), make sure that you also withdraw the related earnings.

On your 2024 tax return, you do not report the excess contribution as it has been withdrawn. The earnings have to reported and taxed in 2024,

For this, you would create a 2025 form 1099-R with the total distribution (excess plus earnings) in box 1, the earnings in box 2a and code PJ in box 7. You then enter this 1099-R on your tax return, and the earnings will be taxed. When entering this form 1099-R, make sure to indicate that the year on the form is 2025, as this is a replica of the form you will receive for year 2025 in 2026.

If there is a loss, that loss is not deductible.

When you receive the 2025 form 1099-R with code PJ in box 7 (in 2026) for this withdrawal, there is no further action needed.

[vze56v6x]

@MinhT1 -  thank you 

I have a few more questions as I am a novice to this.

How do I know what the "excess" contribution is??? 

• Is it safe to assume the entire $2400 is the excess I should withdraw plus the pennies in extra earning?
• Above will essentially zero out the ROTH IRA and close the account as it will have a zero balance.

I am confused with regards to 2025 form 1099-R .

Is this to be reported alongside my 2024 taxes?? Or is this for next year?? The earning are essentially pennies so I am not too worried about reporting anything, I just need to understand how to do it?

You also mention "When entering this form 1099-R, make sure to indicate that the year on the form is 2025, as this is a replica of the form you will receive for year 2025 in 2026." - What does this mean actually? Why would I receive a form in 2026 for year 2025 if I empty the balance of the ROTH IRA now??

FYI My brokerage house informed me I can fill out a form and they will close the account and create the 1099-R for 2025. Does this mean I do not need to do anything for the 2024 tax filing year???  (I report nothing for 2024 and wait until next year to report 1099R for 2025??)

Sorry I am a bit confused and regret opening this stupid account now.

[MinhT1]

As your modified MAGI is more than $240k, you cannot contribute to a Roth IRA. So the entire contribution of $2,400 is excess contribution.

Please read this IRS document.

After you have requested the withdrawal of the excess contribution and the related earnings (before April 15, 2025), you enter on your 2024 tax return a form 1099-R (that you create) as I explained in my first answer with code PJ in box 7. In the follow-up interview in TurboTax, you'll have question asking if this 1099-R is for 2024 or 2025. Reply that it is for 2025 as this 1099-R is the replica of the 1099-R which you'll receive in 2026 for 2025.

In 2026, when you receive the 1099-R for this withdrawal from your broker, there is nothing to report on your 2025 return, as everything has been done in 2024.

Also in TurboTax, if you have already entered the contribution to your Roth IRA of $2,400, go back to that section and delete it, as you would have already withdrawn it.

If you have further questions on this subject, please comment here.

[vze56v6x]

Thank You this makes sense. I appreciate you taking the time to explain!! 🙂

[vze56v6x]

@MinhT1 

FYI above steps to create the 1099 R myself do no work in turbo tax premier. It instead gives me the question on whether I withdrew the funds before due date and I am able to enter the total amount which removes the 6% penalty. The 1099 R will be included in my 2025 tax year taxes since my brokerage house will be sending me the 1099 R in 2026.

[DanaB27]

Please note since you made the contribution in 2024 the earnings on the excess contribution have to be reported on your 2024 tax return. 

You should get a 2025 Form 1099-R in 2026 with codes P and J. This 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2025 Form 1099-R into the 2025 tax return since the withholdings are reported in the year that the tax was withheld. The 2025 code P will not do anything to your income to the 2025 tax return income but the withholdings will be applied to 2025.

To create a Form 1099-R in your 2024 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2024?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On "Is the IRA/SEP/SIMPLE box on this 1099-R checked?" screen answer "No, the box is blank"?
11. On the "Which year on Form 1099-R" screen say that this is a 2025 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024.

@vze56v6x 

[silverluder98]

Good Evening, 

@DanaB27 

@MinhT1 

I have a similar situation to the one in this thread. I opened and contributed to a new Roth account in 2024 and now I've realized that I went over the allowed income limit. I made the following 3 contributions:

5/24 - $530

7/24 - $400

2/5/25 - $2000 - this wasn’t invested in anything yet

All contributions were allocated to the 2024 year. 

I'm planning on removing the money from the account before the 15th deadline. Although I put $2930 into the account, it looks like I will have a small loss. Do I still need to create and file a 1099r with my 2024 or 2025 return  if I had a loss?

If I do still have to create would I still use codes PJ if some of my contributions were added in 2024 and some in 2025, even though they were both allocated to the 2024 year? I'm 42 if that helps. 

[DanaB27]

You should check with you financial institution since they often issue a 2025 Form 1099-R with code 8J for contribution made in 2025 even though they were a contributions for 2024. Most likely you will get two 2025 Form 1099-Rs one with code PJ for the contributions made in 2024 and one with code 8J for the contribution made in 2025 for 2024. It might be best to wait until you receive the 2025 Form 1099-R in 2026.

Generally, only the earnings are taxable and when you had no earnings all that TurboTax does is add an explanation statement.

@silverluder98 

[silverluder98]

Thanks @DanaB27 

Do you think it would be easier to just have them recategorize the Roth to a traditional. 

[DanaB27]

Yes, you can recharacterize the Roth IRA contribution as a Traditional IRA contribution. And if you do not have any pre-tax funds in any of your Traditional/SEP/SIMPLE IRAs then you can do a Backdoor Roth procedure.

Please see How do I enter a backdoor Roth IRA conversion? and What if I made an excess Roth IRA contribution for additional information.

@silverluder98 

[silverluder98]

@DanaB27 

Good Afternoon,

I ended up going through with the recharacterization and have a question regarding it for finishing up my taxes.

Recap of only contributions to a new IRA opened in 2024:
5/24 - $530
7/24 - $400
2/5/25 - $2000 - this wasn’t invested in anything yet

So, $2930 was put into the account and allocated to the 2024 year.

Yesterday the Roth had a total amount of $2,911.61 in all cash. I put in a request to recharacterize the entire amount of $2,911.61 and the recharacterization is complete but only $2,893.34 got moved to the new Traditional IRA and $18.27 cash remains in the Roth. Is it an issue that there's still money in the ROTH even though I shouldn't have been allowed to put anything in there? Do I need to recharacterize or move that $18.27 out and how do I go about reporting this?

[DanaB27]

It seems you had a loss and should have instructed them to recharacterize the $2,930 contribution and then they automatically account for the loss. It seems you need to make a request to recharacterize the rest of the contribution ($18.39). You should check with the custodian to be sure that this is what happened. 

You will enter the recharacterization when you enter the contribution to the Roth IRA 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer ‘Yes” on the “Roth IRA Contribution” screen
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx minus $xxx.xx  loss were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" if you are thinking about doing a backdoor Roth. Otherwise select "No". (If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

[silverluder98]

@DanaB27 

It looks like you are correct and the remaining $18.39 needs to be recharacterized, however it's taking my broker a long time to do this and I'm not confident it will be completed by April 15th. Aside from this I'm ready to file my taxes but I'm trying to figure out the best way to move forward without causing any additional headache. I'm planning on waiting until the 15th to file to see if the money has been recharacterized or not.

In the event that this $18.39 hasn't been recharacterized by April 15th I was thinking I would just enter that amount as contribution and pay the penalty(it's only $1). Is it ok if that amount gets recharacterized after the 15th and after I've paid the penalty and filed? If so, what would my next steps be? There would be a loss so I shouldn't owe any taxes on that amount.

[DanaB27]

You can file an extension then you have until October 15th to recharacterize the contribution (Pub 590-A).

Please see How do I file an IRS tax extension? 

@silverluder98