Removing Excess 2024 Roth IRA contribution for 2025 Tax Year

BenT

Hi, last year on 1/3/25 I made an excess $7000 Roth IRA contribution for the 2024 tax year. I did not remove the $7000 from the Roth IRA account and paid the penalty on my 2024 taxes. I am now filing my 2025 taxes and am still incurring a tax penalty for the $7000 excess 2024 Roth IRA contribution that I left in the account. I did not contribute to my Roth IRA account for the 2025 tax year.

I heard that I can do a recharacterization and transfer the $7000 from a Roth IRA account to a traditional IRA to avoid incurring additional tax penalties for the 2025 year and to avoid an early Roth IRA withdrawal penalty. Is this correct? How do I report all of this on the FreeTaxUSA software? Thank you.

Taylor

Hello BenT,


It sounds like the excess Roth contributions were attributed to 2024. If this is the case, the IRS states a recharacterization can typically be done if it is completed by the filing date or six months after if you filed by April 15, 2025.

"Generally, you can recharacterize (correct) an IRA contribution by making a trustee-to-trustee transfer from one IRA to another type of IRA. Trustee-to-trustee transfers are made directly between financial institutions or within the same financial institution. You must generally make the transfer by the due date of your return (including extensions) and reflect it on your return. However, if you timely filed your return without making the transfer, you can make the transfer within 6 months of the due date of your return, excluding extensions."

Top left column of page 6:
https://www.irs.gov/pub/irs-pdf/i8606.pdf

After that date, the options for the excess $7000 are typically to either withdraw it or apply it to a future year's contribution. Since you didn't contribute for 2025, you can typically apply the $7000 excess from 2024 toward your 2025 contribution limit, assuming you have earned income that qualifies you to make a 2025 contribution and the amount doesn't exceed the 2025 limit.

If you don't have earned income for 2025 or don't want to apply it as a 2025 contribution, you'd need to withdraw the excess to stop the recurring penalty.