ROTH IRA - Withdrawing Excess Contributions

TaxedByAlexis
TaxedByAlexis Member Posts: 2 Newcomer
in Filing my taxes

Hey all,

I was being overzealous and maxed out my contributions to both the 2024 and 2025 years. I am currently a student who utilized extra scholarship money that I had stuffed in a savings account to make those contributions (i.e. I have no reported earned income).

I was not aware that I ineligible to make these contributions, so I am hoping to be provided some guidance on how to properly amend this.

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  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 615
    edited August 12

    Hi TaxedByAlexis,

    You are right. Basically, what you have is an excess Roth contribution because you didn't have qualifying income. You must withdraw the whole amount including earnings or you will pay a 6% penalty every year you leave it invested in there. When you withdraw the contribution from the Roth IRA, you will then get a 1099-R for 2025. That 1099-R is important for preparing your 2025 return. And it will assist in amending 2024.

    You will need to amend your 2024 return and report the excess and pay a penalty.

    You have time to withdraw the 2025 contribution without paying any penalty, but you will still get a 2025 1099-R for the withdrawal. Make sure you report your basis (contribution), which is not taxable, when you report the 1099-R on your 2025 return. Any earnings will be taxable and, as I mentioned before, you likely will have a penalty for 2024.

    I suggest you create an account in FreeTaxUSA and contact customer support. They can look over your account and assist you. Even if you did not prepare your original 2024 return with FreeTaxUA, you can amend it with us at a low cost.

  • TaxedByAlexis
    TaxedByAlexis Member Posts: 2 Newcomer
    https://community.freetaxusa.com/discussion/comment/5899#Comment_5899

    Hi MatthewD, thank you for the thorough response! I forgot to mention that I did not file for the year 2024 and did not apply for an extension. What would now be my process to resolve this problem?

  • CoryF
    CoryF FreeTaxUSA Agent Posts: 213

    Thank you for this reply.

    You first need to initiate a withdrawal of the 2024 contributions from the Roth IRA. You have till the end of 2025 to generate some earned income to qualify for the 2025 contributions to Roth IRA. This will start the process outlined by MatthewD.

    As for filing, you can still file your 2024 tax return and take advantage of E-filing. Start a new account using FreeTaxUSA.com, and then proceed to the Deductions/Credits area. This is the part to report your IRA contributions and your College 1098-T to input the scholarship money used for non-education purposes (i.e. Roth Contributions) The software will pick up that you didn't have any earned income and provide the same message as above. You will need to answer the question "Did you withdraw any Roth IRA contributions by the tax filing due date?" NO as this is the issue you are up against. This will cause the 6% tax on the contributions. At the max contributions of $7,000, the tax will be $420. I suggest you file and pay the owed amount as soon as you can. This way you won't have to worry about the IRS catching up to this mistake later and owe more.

    You will need to Amend this return after you pay the IRS to show a withdrawal of the 2024 excess contributions, however, I suggest you wait to amend until you receive the 1099-R in January 2026. This way you won't need to amend your tax return from 2024 twice. You can use our customer support team within your FreeTaxUSA account if you have account specific questions that you need answered.

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