Excess Roth Contribution, how to handle

[BulldogTom]

Taxpayer is over the limit by about 9K this year (first time over the limit).   Put 7K in a Roth.   Only 820 is allowed.   I have heard about this situation, but I have not dealt with it with a client before.  

If he withdraws before the due date (including earnings) can we avoid the penalty?   Can he recharacterize?   They have room to make it traditional and deductible.

Help please.

Tom
Longview, TX

[kathyc2]

Yes, he can withdraw the contribution and what it earned by due date without penalty.  Next year he will receive a 1099R and the earnings will be taxable but no penalty. 

When you say they does it mean MFJ?  Would spouse maxing traditional make AGI low enough to keep Roth?

[BulldogTom]

28 minutes ago, kathyc2 said:

When you say they does it mean MFJ?  Would spouse maxing traditional make AGI low enough to keep Roth?

Yes, MFJ.  I took a look at that, but when I put in a hypothetical 7,500 traditional contribution, MAGI does not change on the Roth worksheet.  

Tom
Longview, TX

[Lion EA]

Did he contribute for 2023 but during 2024? Then he could work with his broker to make it a 2024 Roth contribution instead.

Or, 2023 non-deductible Traditional IRA, followed by a back-door Roth.

Or, remove with earnings by the due date.

(I think. It's late, and I'm tired.)

[kathyc2]

11 hours ago, BulldogTom said:

Yes, MFJ.  I took a look at that, but when I put in a hypothetical 7,500 traditional contribution, MAGI does not change on the Roth worksheet.  

My bad.  Deductible IRA's need to be added back for MAGI in this case.

If the higher 2023 income is a one off he can also keep the money in, pay the penalty and then use 2023 contribution as a 2024 contribution. The penalty is calculated each year the overage remains in account so the only way this may make sense is if 2024 income will be low enough to be within the higher 2024 income limits. 

It is rather strange that someone at this income level is not covered by a retirement plan at work.

[BulldogTom]

1 hour ago, kathyc2 said:

It is rather strange that someone at this income level is not covered by a retirement plan at work.

He is retired.   Gets to contribute as a spousal IRA from his wife's sch C earnings.   They will not be able to contribute in 2024 because she closed her real estate business in 2023 and will only have retirement income and no wages or SE income to qualify.  

Tom
Longview, CA

[jklcpa]

1 hour ago, BulldogTom said:

He is retired.   Gets to contribute as a spousal IRA from his wife's sch C earnings.   They will not be able to contribute in 2024 because she closed her real estate business in 2023 and will only have retirement income and no wages or SE income to qualify.  

Tom
Longview, CA

He will have penalties each year the excess remains in the IRA unless he corrects it by withdrawing with earnings now, is able to recharacterize to traditional, or until the year he distributes enough through a normal ROTH distribution to eliminate that penalty on the form 5329.

Give the client his options because at over $400 in penalty each year, he may want to correct it.  With my last one of these, the excess into his trad IRA was only $500 and client opted to leave it in because the penalty was only $30 and a distribution would be taken the following year and would eliminate the penalty anyway.