Roth IRA mistaken contribution

Terry Says

Here is the income limit for 2022 contributions, presumably the year in which you made it:

If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $144,000 for tax year 2022 and $153,000 for tax year 2023 to contribute to a Roth IRA, and if you’re married and file jointly, your MAGI must be under $214,000 for tax year 2022 and $228,000 for tax year 2023.

If you contributed too much for 2022, you’re in luck! The tax deadline has not passed so you can get the money out without penalty. Follow these instructions from Investopedia:

3 Ways to Handle Excess Roth IRA Contributions
If you find that you’ve contributed too much to your Roth IRA, there are several possible remedies. You’ll generally need to act before your tax-filing deadline for the year (including extensions) to avoid penalties. The penalty is currently a 6% tax on your excess contributions.

These are your basic choices:

1. Withdraw Your Excess Contributions
You won’t face any penalties if you simply withdraw your excess contribution—plus any income it has earned in the meantime—by the due date for your tax return, including extensions. You will, however, have to include the earnings portion in your taxable income for the year.

The technical term for these earnings is net income attributable (NIA).

Note that even if you have already filed your tax return for the year, you can still withdraw the contribution within six months of your tax return’s due date (excluding extensions).

What you will need to do, according to the IRS, is “file an amended return with ‘Filed pursuant to section 301.9100-2’ written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.”

2. Recharacterize Your Excess Contributions
Another option is to recharacterize your excess Roth contributions by moving them into a traditional IRA. You can do that by instructing the financial institution that holds your Roth IRA to transfer the excess amount, plus any income it has accumulated, into a traditional IRA either at that same financial institution (a same-trustee transfer) or another one (a trustee-to-trustee transfer).

The IRS says, “If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA).”
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Note that although the Tax Cuts and Jobs Act (TCJA) banned recharacterizing Roth contributions from a traditional IRA or other tax-advantaged accounts, starting in 2018, that does not apply to recharacterizing excess contributions in this situation.

3. Apply Your Excess Contributions to a Future Year
You can also apply the excess contribution and its earnings to a future year’s Roth IRA as long as you stay within the limits for that year.

In this case, you may still be subject to the 6% penalty for the year.

What Happens if You Don”t Remove Excess Roth IRA Contributions?
If you don’t remove any excess Roth IRA contributions from your account, you’ll be subject to a 6% tax penalty year after year until you do.