Did I contribute too much into my ROTH IRA this year?

Submitted by Shulamit Rymberg on Mon, 2022-11-28 04:23

I contributed $7,000 into my ROTH IRA account on January 2nd of this year. I was 71 at the time and still working full time. I retired on January 8th. Reading your articles on excessive contributions, did I contribute too much money into my ROTH IRA as I did not earn $7,000 for the 8 days that I did work this year? Thank you in advance for answering this question.

PS—If I did contribute too much money, do I just take it out of my ROTH IRA account or is there a particular form I must file?



Submitted by David Mertz on Mon, 2022-11-28 13:20

  • Unless you file jointly with a spouse who has more compensation than you that can be used to support the rest of your contribution, yes, you’ve made an excess contribution and to avoid an excess-contribution penalty the excess needs to be corrected by the due date of your tax return, including extensions. With no other supporting compensation, your contribution is limited to the amount shown in box 1 of your W-2 for this year.
  • To correct an excess contribution before the due date of your tax return, including extensions, you must request that the Roth IRA custodian make an explicit return of contribution in the amount of the excess, not a regular distribution.  The custodian will calculate and distribute to you the amount adjusted for any investment gain or loss in the Roth IRA between January 2nd and the date of the distribution.  If the adjustment is for a gain, the gain will be taxable on your tax return.
  • Note that in the unlikely event you have very large investment gains in the Roth IRA since January 2nd, you have the option of paying the penalty for this year and next year after the extended due date of this year’s tax return make a regular distribution of an amount equal to the excess.  In that case the gains stay in the account.

Submitted by Shulamit Rymberg on Mon, 2022-11-28 19:05

First, thank you for your quick and detailed response to my question.  Second, my only paystub for this year shows a total gross pay $7,356 and a net pay of $3,741 (this included PTO of 148 hours).  My question is which amount do I deduct from my $7,000 IRA contribution as being an “excess conribution”.  Again thank you so much for your help.

Submitted by David Mertz on Mon, 2022-11-28 21:04

  • The amount that you are eligible to contribute is the amount that will appear in box 1 of your W-2.  That would typically be the gross amount minus any elective deferrals you made to the employer’s retirement plan.  You might be able to figure out the amount that will appear in box 1 of your 2022 W-2 will be determined by comparing your 2021 W-2 with your last paystub from 2021.
  • If you made no elective deferrals to the employer’s retirement plan, it might be the case that box 1 of your 2022 W-2 will show $7,356 and you will not have made an excess Roth IRA contribution (unless your modified AGI for the purpose exceeds the threshold for your filing status).  Amounts withheld for federal and state taxes, Social Security and Medicare do not reduce the amount that will appear in box 1 of your W-2 but do reduce your net pay.

Submitted by Shulamit Rymberg on Tue, 2022-11-29 01:36

Thank you so very much for your answers.  You have given me peace of mind and I now know what I need to do.  Again, thank you!

Submitted by Shulamit Rymberg on Wed, 2022-11-30 23:24

Find myself having to ask one more question.  So I have gross income for 2022 of $7,356, with $1,664.26 of pre-electives deferral (contribution to my 401K plan). Deducting  this amount from the $7,000 contribution I made into my ROTH IRA in 2022 leaves me with $5,822.34.  I traded stocks within my ROTH IRA account, with real losses (not paper losses) totaling $(-2,899.58) in 2022.  Can I take these losses of $(-2,899.58) to offset my over contribution of $1,664.26, OR do I still need to withdraw $1,664.26 from my ROTH IRA account ASAP?   I received $54.74 in dividends on stocks that I still own and have not sold.  Do I need to add the dividend amount to the $1,664.26 amount ?  Again, thank you for your help.

Submitted by Alan - IRA critic on Thu, 2022-12-01 00:34

  • Losses in a tax deferred account like a Roth IRA cannot be used to offset any gains elsewhere or any other income. DIvidends paid in a taxable account (not an IRA) are included in your taxable income, but are not earned income that supports an IRA contribution. At this point in the year, you should just wait until you receive your W-2 in January, and the amount in Box 1 will be your 2022 IRA contribution limit. If you still have an excess contribution, you will know the exact amount and will have until 4/15 to have the excess returned, or until 10/15/2023 if you either file your 2022 return or file an extension by 4/15.
  • Note that if you do have an excess after receiving the W-2, when you tell the custodian how much the excess 2022 contribution is, the custodian must run a calculation of the gain or loss on that contribution. If your Roth IRA value dropped 20% from 1/2/2022 till the date your return is processed and your excess contribution was 1200, the custodian would return 80% of that 1200  (960) to you. This would not be taxable.
  • Just to make sure that all facts are correct, you should verify that your contribution in Jan, 2022 was assigned as a 2022 contribution, not a 2021 contribution.  That should be clear from your IRA statements.

Submitted by David Mertz on Thu, 2022-12-01 12:49

It appears that box 1 of your W-2 will have $7,356 – $1,664.26 = $5,691.74 making your excess contribution $1,308.26, but you might want to wait for the W-2 to be sure.  With losses while in your Roth IRA, the loss-adjusted distribution calculated by the IRA custodian will be less than $1,308.26.

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