2023 Roth IRA Contribution-Excess
I have 2 clients, married couple in their 60s. Both made 2023 Roth IRA contributions in March 2024 ($7,500 each, $15k total). They went on tax extension and their MAGI ended up being too high to qualify for 2023 Roth IRA contributions. On 10/22/24 we removed the 2023 Roth IRA contributions and excess earnings. We tried to do this before 10/15 but client was unresponsive. The total amount removed from the husband’s Roth IRA was $8,375.91 ($7,500 contribution plus $875.91 of excess earnings). The total amount removed from the wife’s Roth IRA was $8,375.91 ($7,500 contribution plus $875.91 of excess earnings). Will this $1,751.82 of excess earnings be taxable income to them on their 2024 tax return? If so, where does that get reported on their return? Under IRA distributions on the 1040?
Permalink Submitted by Alan - IRA critic on Thu, 2024-11-14 13:13
It’ strange that the custodian would process a corrective distribution with earnings after the deadline. Are they in a federal disaster area for which the 10/15 deadline was extended? If not, they should verify that the 1099R to be issued in January will be coded for a timely distribution of excess (Code JP). If coded as such the earnings will be taxable on the 2024 return because the contributions were made in 2024. This distribution will be reported on line 4a and 4b (the taxable earnings) of Form 1040. There is no longer a penalty on the earnings.
However, if the 1099R does not include the P code in Box 7 (only code J) because it was not a timely corrective distribution, then the distributions will have to be reported on Part III of Form 8606 and while they likely will be tax free coming from the balance of regular Roth IRA contributions, the excess amount will still be in the Roths and a 2023 6% excise tax will be due.
Clients should check into this now by asking the custodian how the 1099R will be coded. Clients should also determine if they have excess Roth contributions for years prior to 2023 due to MAGI being too high.