Overcontributed to Roth IRA

[Cheerio]

I realized this morning that the capital gains and dividends we received on our taxable investments caused a bump to our MAGI and, as a result, we overcontributed to our Roth IRAs for 2021. Both our taxable and retirement investments are at Vanguard, so I can (fairly easily, I hope) remove the excess from the Roth IRAs and move it to our taxable accounts. However, will the earnings I receive on the excess contribution count as earnings in 2021, thus increasing my MAGI and decreasing my allowed contribution even further? Or will they count as earnings in 2022? If they count in 2021, it seems like I'm going to get into an iterative process in which the earnings increase my MAGI, thus decreasing my contribution amount, and causing me to do the whole process over again.

[mainelyfoolish]

Your question intrigued me, so I just looked up IRS Publication 590-A and it does say that your earnings on the excess contributions will count as 2021 income. If you’re wanting to remove the excess contributions ASAP and not wait to prepare your taxes (I’m assuming any commercial software program would flag your excess contribution for you), I would do the Roth IRA MAGI calculation through two iterations and then maybe round up a few dollars and make the withdrawal. (This is assuming your income is within the narrow Roth IRA phaseout range. If you’re completely ineligible for the Roth IRA, then you just remove all your contributions plus earnings.)

[awkwardpenguin]

Yes, the earnings increase your MAGI for 2021, which then decreases your contribution further. The year this happened to me I said "fuck it" and took out everything (contributions and earnings) but I was phased out to only a $200 contribution anyway.

If you expect Roth eligibility in 2022 you can just leave the contributions in and count them toward this year's contributions. You have to pay the 6% excise tax on the excess contribution for the one year they were excess, but I believe you don't have to deal with the earnings at all. It's all fairly easy to calculate on form 5329.

[mich1]

Jan 7, 2022 9:42:11 GMT -5 awkwardpenguin said:

Yes, the earnings increase your MAGI for 2021, which then decreases your contribution further. The year this happened to me I said "fuck it" and took out everything (contributions and earnings) but I was phased out to only a $200 contribution anyway.

If you expect Roth eligibility in 2022 you can just leave the contributions in and count them toward this year's contributions. You have to pay the 6% excise tax on the excess contribution for the one year they were excess, but I believe you don't have to deal with the earnings at all. It's all fairly easy to calculate on form 5329.

This is what I did.  I contributed, we got our MAGI and I just wound up pulling out my entire contribution as the small amount I was allowed was not worth it.  

It is fairly easy to pull contributions out via Fidelity, they just walk you through it and I had the contributions put back into my savings account.  Personally, I didn't like the idea of paying a 6% excise tax on the excess contributions for a contribution I may or may not be able to make in the future (I was not).