Excess Roth IRA contributions question

Question

Hi everyone,

I'm currently a college student, and I only made $5000 in 2023 through a part-time job. However, I have contributed the full $6500 to my Roth IRA (because I have previous savings) for 2023. For that reason, I now have around $1500 of excess Roth IRA contributions that I need to take out before April 15 (I just learned that the IRS only allows you to contribute up to the taxable income amount).

I made some really **** investment mistakes last year (please don't judge me, I have learned my lesson and am not going to do that again), and I sold them all before the end of 2023, and my balance as of 12/31/2023 was around $1000 (I lost about $5000 in my Roth IRA). For this 2024 year, I have contributed $2000 so far to my Roth IRA, so my balance at this point is around $3000.

My question is, how much do I have to withdraw before the tax deadline to avoid the penalty? Do I have to withdraw $1500, or nothing at all since I lost more than the excess contribution of 2023?

Thank you so much for the help! I really appreciate it. I can promise that I have learned a lot more about investment I will just stick with low-cost index funds now.

JanaA · Accepted Answer

Hello Jacob!

We all make mistakes! For your 2023 filing, you will need to withdraw the excess contribution amount, which based on the information provided would be $1500. When you contribute more than your earned income for the year, the IRS will assess a penalty if the excess contribution is not withdrawn.

JanaA · Accepted Answer

When you decide to withdraw the excess funds is up to you. The IRS specifically states, "You must complete your withdrawal by the date your tax return for that year is due, including extensions."

If you want to wait until closer to the deadline that is acceptable. However, you will want to wait and file your return until you have withdrawn the excess so that you can report the transaction correctly.