Roth IRA Excess Contribution - What's the Best Way to Proceed?

[jjjarrell18]

I opened a Roth IRA in 2024 and contributed $8,000.  According to the Fidelity calculator, I was eligible to contribute to a Roth IRA based on our (married, filing jointly) MAGI for 2023.
 
I am  doing our taxes in TurboTax, and apparently we made too much in 2024 for me to have contributed to a Roth IRA.  TurboTax is telling me that I will incur a 6% penalty on the total amount now and each year going forward, unless I withdraw the excess contribution (which is the entire value I assume) or change the Roth IRA to a Traditional IRA.
 
As of December 31, 2024, the Roth IRA was worth $8,040.  Now, however, the value has dropped to $7,572 due to market declines (no money was withdrawn).
 
Is converting the Roth to a Traditional IRA the best way to proceed here (as opposed to withdrawing the total at a loss)?  Any advice would be greatly appreciated.
 
Thank you.

[DanaB27 · Accepted solution]

Yes, you can chose to recharacterize the Roth IRA contribution as a Traditional IRA contribution. If you do not have any pre-tax funds in any of your traditional/SEP/SIMPLE IRAs then you could do a backdoor Roth and convert the funds to a Roth IRA.

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 plus $xxx.xx earnings (or 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)

You will get a 2025 Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2024 and this belongs on the 2024 return. But a Form 1099-R with code R will change nothing on your return. You can only report it as mentioned above. Therefore, you can ignore the Form 1099-R with code R when you get it in 2026.

Please see What if I made an excess Roth IRA contribution for additional information.