Excess Contribution to Roth IRA

Freetax12345

In 2024 as I was preparing my tax return for 2023, I discovered I overcontributed to a Roth IRA for CY2023. I contributed the full $6,500 but my MAGI was within the phaseout range. Free tax USA informed me I overcontributed by $1,440. Before filing my taxes I removed the excess contribution of $1,440 and the $518 gain which I assume is the earnings on the contributions.

This year I received a 2024 1099-R form with distribution code JP that reflects this 2023 excess contribution removal. Box 1 is $1958 and box 2 is $518. My understanding I need to file a 2023 amended return since this is considered income.

As i begin preparing the 2023 ammended return, I get an alert that I overcontributed to Roth IRA this time by $230. It seems to me that after I report this higher income I get pushed higher into the MAGI phase out range which means I was actually eligible to contribute less to the Roth.

Now I could do another excess contribution for $230, but then I'll have to go through this same process next year receiving the 1099-r form > income increases > lower eligibility for Roth.

I am not eligible for Roth contributions in 2024 and I've maxed out traditional already for 2024 and 2025.

What action can I take this year to correctly report 2023 and 2024 and also avoid this infinite loop of 2023 amendments?

Thanks you in advance.

KeriC

Based on the Box 7 code of "JP", your 1099-R should be reported on the tax return for the year in which the contribution was made. If your contribution was made in 2023, you are correct to amend your 2023 return to report the withdrawal of your excess contributions plus earnings.

This situation involves a circular calculation: reporting the earnings as taxable reduces your allowable Roth IRA contributions.

The IRS has not provided guidance on how to address this circular calculation. As a result, I cannot confirm whether your original withdrawal satisfies the requirements to avoid a penalty, nor can I offer direct IRS instructions on how to resolve this issue. However, here are two possible approaches:

Option 1: Enter the Form 1099-R and, when prompted, indicate that you withdrew the full $1,670 ($1,440 + $230) of excess contributions. Keep thorough records of your original excess Roth contributions and the corrective distribution, then file an amended return. If the IRS later requests details about the excess contribution, you can provide documentation to show that you corrected it and explain the circular calculation.

Option 2: Enter the Form 1099-R and report only the actual amount withdrawn when asked if you removed the excess. This option will result in a 6% penalty on any remaining excess contributions that were not withdrawn. The uncorrected excess amount will carry forward to 2024. If you are unable to apply it as a Roth IRA contribution for 2024, the 6% penalty will also apply to your 2024 tax return. To avoid the penalty in 2025, you must withdraw any remaining excess by the end of that year.

Unfortunately, I cannot determine which option fully aligns with IRS guidelines. Option 1 avoids the 6% penalty for 2023 and 2024 but may lead to an IRS inquiry requesting additional information regarding the excess contribution.