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 

3 additional quick questions

1. should this screen in turbo tax also be zero because the recharacterization is for a traditional IRA..I initially had put 2400 here and 0 in the next screen but after reading this again I think all IRA Roth screens should show zero, correct?

Screenshot A

2. Should the 2nd screenshot about the withdrawal also be zero or $2400?

Screenshot B

3. I am a bit confused in filling out form 1099 R/ It is a multi page / line form and other than filling in box 7 with code PJ I am unclear what else must be entered.  I do not yet know what the total amount withdrawn will be - probably around $2400.18. Does this need to be on Form 1099 R.   I also see code P referring to 2023.

C

Thank You