Excess Roth Contributions in 2023

[maf25]

I am a new community member and have a few questions for a CPA/tax expert.  For the first time ever, we had excess contributions in my husband's Roth IRA in 2023 due to our MAGI being too high.  On April 9, 2024, the IRA custodian processed the return of the excess contribution requested and earnings.  The earnings resulted in our MAGI increasing slightly, so we still have an excess contribution, which results in a 6% excise tax.  My husband will be 59 1/2 before year-end 2024.  We are trying to decide our next step.  Do we leave the 2023 excess contributions in the Roth and pay the excise tax in 2023 and hope that we can use/absorb the 2023 excess contributions in 2024 or do we request another refund of excess contributions and associated earnings before October 15, 2024 and amended our 2023 tax return.

If we leave the excess contribution in my husband's Roth IRA in anticipation of applying it to 2024 contributions, what happens if we cannot use/absorb the remaining 2023 excess contributions as 2024 contributions due to our MAGI in 2024 being too high?  Since my husband will be 59 1/2 by year-end 2024, would taking the remaining excess 2023 contribution out as a distribution be allowed?  If so, what would be the tax implications in 2024 of doing this and would we be required to take out the 2023 and 2024 associated earnings as well?   

It is difficult to know how much of the excess to request as a return since it is hard to know what the related earnings will be as calculated by the IRA custodian until after the request is processed.  Does the tax code allow us to request a return of the remaining 2023 Roth contributions of $6,520 and related earnings to totally clear up this issue?  Or, are we only allowed to request a return of the actual excess contributions that would just get us within the limits?  

Any insight is appreciated.  

[DanaB27 · Accepted solution]

Yes, you can request another withdrawal of excess contributions plus earnings. You should withdraw more than the excess contribution since you are in the phaseout range to avoid creating a new excess contribution when the earnings are added to your MAGI.

Yes, if you are allowed to make Roth IRA contributions for 2024 then you can pay the 6% penalty for 2023 and apply the excess to 2024. This is done on your 2024 tax return and does not involve your financial institution. 

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2023 (if it wasn't carried over).
6. On the "How Much Excess to 2024?" screen enter how much you want to apply to 2024.

Yes, you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. After the extended due date you would have to request a regular distribution (leave the earnings in the account) and pay the 6% penalty on your 2023 tax return. If you want to avoid the penalty for 2024 you will have to remove the excess by December 31, 2024.

[maf25]

Thank you for the quick response.  I have a few clarification questions to make sure I understand.  I will also mention that our 2023 excess Roth contribution right now is only $130 resulting in $8 excise tax.  I just want to clean this up as easily as possible.  

If we file our taxes today or tomorrow showing the 2023 excess Roth contribution and pay the 6% excise tax, we can still request another withdrawal of 2023 excess Roth contributions plus earnings before October 15, 2024 and file an amended 2023 return, correct?  If so, would there be any interest or penalties associated with filing the amended return since we will likely have to pay a small amount of tax due to the earnings increasing our MAGI, even if our initially filed tax return resulted in a significant refund?  

Let's say we leave the 2023 excess contribution in the Roth and pay the 6% excise tax on our 2023 taxes.  In late 2024, we determine that we cannot use/absorb the 2023 excess contribution in 2024.  Are you saying that we could request, in December 2024, a regular distribution of the 2023 excess contributions ($130) and leave the associated earnings in the Roth without any interest or penalty?  If that is the case, it sounds like it makes the most sense to leave the $130 excess contribution in the Roth and just take a $130 regular distribution, without earnings, in December 2023.  Am I understanding this correctly?  

A related question as we are trying to determine if we should request a refund of 2024 YTD Roth contributions now or wait until later in the year.  I am concerned that if we wait until later in the year that we will end up with a year of earnings to report on our 2024 tax return.  We have already made $1,998 in 2024 Roth contributions to my husband's Roth.  I have run some preliminary estimates and suspect we will have excess contributions again in 2024 when adding the 2023 excess contributions ($130) and the 2024 contributions ($1,998) together.  We have stopped making any additional 2024 contributions.  In December 2024, if it still looks like we will have excess contributions, will the 2023 excess be a regular distribution ($130 - leaving earnings in the Roth with no tax or penalties)?  And what about the 2024 contributions - would we make a request for refund of 2024 contributions with or without earnings?  If with earnings, I think it might make sense to make a refund request for the 2024 contributions now rather than waiting since we will be taxed on nearly one year of earnings.  Is my understanding accurate?  

Sorry for the lengthy follow-up.  I appreciate your insights.  

[DanaB27 · Accepted solution]

Yes,  you can still request another withdrawal of 2023 excess Roth contributions plus earnings before October 15, 2024 and file an amended 2023 return. No, there shouldn't be any penalties as a result of doing this.

Yes, if you find out you cannot apply the excess contribution as a 2024 contribution then you can leave the earnings in the Roth IRA and will only request a regular distribution. The excess has to be removed by December 31, 2024 to avoid the 6% penalty on your 2024 return.

To return the excess contribution for 2024 you will request the withdrawal of excess contribution plus earnings by the due date of the 2024 return. Yes, it makes sense to make this request sooner than later if you want to avoid paying taxes on a large amount of earnings.

[maf25]

Thanks again for the quick response.  A couple of additional questions.  

Are we allowed to request a refund of his 2024 excess Roth contributions plus earnings now (paying any required taxes on the earnings in 2024) and still leave the 2023 excess contribution in the Roth for possible use/absorption in 2024 and then just request a general distribution in late 2024 for the 2023 excess contribution, if we cannot absorb/use it?  Or, do we have to make a decision about how to handle the 2023 excess contributions before making a refund request related to the 2024 contributions plus earnings?  I am just wondering if there is some type of requirement in the tax code that a taxpayer has to make decisions about prior year excess contributions before requesting a refund of current year contributions plus earnings.  

It seems unusual to me that the 2023 excess contribution has to be refunded with earnings (paying taxes on the earnings in 2023) if taken out of the Roth before filing the 2023 taxes, but in 2024, if we cannot use/absorb the 2023 excess, then we can take it out via a general distribution, leaving the earnings in the Roth, and not pay taxes on the distribution or earnings, if withdrawn before year-end 2024.  So, it may have made better sense to leave the total 2023 excess contribution in the Roth and see if it could have been used/absorbed in 2024, and if not, then just do a general distribution, without earnings, before year-end 2024.  Therefore, we would not have had withdraw earnings and pay tax on earnings related to the 2023 excess contributions.  Am I understanding that correctly?    

Thanks again.  I have found your responses very helpful.  

[DanaB27 · Accepted solution]

Yes, you can request the 2024 excess contribution plus earnings now and decide about the 2023 excess contribution later. As long as you remove the 2023 excess contribution as a regular by December 31, 2024, it doesn't matter when you remove the 2023 excess contribution.

Yes, if you withdraw the 2023 excess contribution plus earnings before the extended due date of the 2023 return then you never pay the 6% penalty because it is deemed as never contributed. But the earnings will be taxable income.

After the extended due date you pay the 6% penalty on the excess contribution and then you only have to remove the excess as a regular distribution. The earnings can stay in the account and do not increase your taxable income.

[maf25]

I really appreciate all of your help and insight related to all of my questions today.