2023 Roth IRA Contribution
I have clients, couple in their early 60s. They will be filing an extension for their 2023 tax return and will not know their 2023 MAGI until closer to 10/15/24. They may or may not qualify for a Roth IRA contribution. My understanding is that 2023 Roth IRA contributions must be made on or before 4/15/24 regardless of filing for an extension. If they make their 2023 Roth IRA contributions ($7,500 each) before 4/15/24 but find out closer to 10/15/24 that 2023 MAGI was too high and they can’t make 2023 Roth IRA contributions, I know they can remove those excess contributions before 10/15/24. There is no penalty as long as they remove the excess 2023 Roth IRA contributions before their 2023 tax return is filed on 10/15/24, correct?
I think they would have to pay ordinary income taxes on any earnings the $15,000 makes in their Roth IRA if they have to remove the 2023 contributions before the 10/15/24 deadline correct? But no 10% early withdrawal penalty on earnings since both clients are over 59.5?
If they invest the $15,000 in their Roth IRAs and the value drops to $14,000 and they determine they need to remove their excess 2023 Roth IRA contributions, do they pull out $15,000 (the amount they put in) or $14,000 (the market value of their original $15k investments)? Do they get any tax write off for losses if they have to pull out excess 2023 contributions?
Permalink Submitted by David Mertz on Fri, 2024-03-08 01:00
Correct, there is no penalty if the excess is removed or recharacterized before the extended due date of their tax return, provided they make a timely extension request. The amount to be moved out the Roth IRA in either case is the amount contributed accompanied by any investment gain or loss. There is no deduction for a loss. In the case of a loss it might make more sense to recharacterize rather than obtain a return of contribution. (It might make more sense to recharacterize in either case.)
Permalink Submitted by Brandon Blanchard on Fri, 2024-03-08 15:19
Thanks. In the event of a gain or loss is that based on how the $7,500 contribution was invested between 4/15/24-10/15/24 or how the overall Roth IRA performed during that time frame regardless of what the $7,500 was actually invested in?