Excess Roth IRA contribution in both years

Submitted by Silvia Lam on Tue, 2023-03-07 02:46

Hi, I would like to withdraw the excess contribution of 2022 Roth IRA. It could be quite straightforward. However, without realizing my 2022 income exceeding the threshold for the Roth IRA, I already started my 2023 Roth IRA contribution early in Jan 2023. So I’m facing a situation that I sneed to withdraw my 2022 excess contribution, but also my 2023 contribution because my income will likely disqualify me from contributing 2023 Roth IRA.

I’m not sure the right way to withdraw the amount. Is there an order of doing it? For example, do I need to withdraw my 2023 Roth contribution (even though the tax year will be next year) before I withdraw my 2022 Roth excess contribution? I hope to withdraw both my 2022 and 2023 contributions at once if possible.

The reason I’m asking is because things got confusing to me when I calculated NIA. Based on the formula that IRS provided, my recent 2023 Roth contribution could result in a net gain (+NIA) but my 2022 Roth contribution had a net loss (-NIA). Meanwhile, my current Roth account has a loss overall because the 2022 net loss is larger than the net gain generated by 2023. If that’s the case, do I need to pay tax on the net gain from 2023 next year? Note that if I’m withdrawing both 2022 and 2023 contribution together, it’s still a loss overall.

Last question, if I keep my 2023 contribution in the Roth now, and just withdraw 2022 excess contribution to avoid penalty for the tax year. When calculating the withdrawal, should I include 2023 contribution in the the Adjusted opening balance? The reason I asked because the Adjusted closing balance included the contribution and earning from 2023 as of today. I appreciate for your time reading this.



Submitted by Alan - IRA critic on Tue, 2023-03-07 03:41

  • You can request the distributions be returned in any order you want, but the deadline for the 2022 contribution comes first.  2022 would typically generate a loss as you indicated, therefore your 2022 return need only contain an explanatory statement regarding the excess and return of the excess. There will be no gain to be added to your 2022 taxable income. 
  • You would not be calculating the NIA with most custodians since their software will do it. A few custodians however may ask you to. But your calculations are worthwhile anyway to check against the actual distribution you receive. Since 2023 has some gains, you may want to wait until later when you are more sure that your income will be too high. You may also consider recharacterization and conversion for both years (back door Roth) if you do not have pre tax IRA balances that would make the conversion taxable.
  • Yes, the 2023 contribution should be included in the Adjusted Opening balance for the return or recharacterization of both year’s contributions. 

Submitted by Silvia Lam on Tue, 2023-03-07 17:01

Thank you for the clarifcaiton and insightful suggestion. The custodian that my client has have her to do theri own cacluation. So just to clarify, when calcuating the net income for the 2022 Roth contribution , because 2023 roth contribution was made, I should include 2023 in the Adjusted Opening balance. Correct?

Submitted by Alan - IRA critic on Tue, 2023-03-07 17:37

Yes, correct.

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