So, my wife and I inadvertently contributed to our Roth IRAs in 2023 being over the salary limit. We went over the threshold by a few K. We realized it when notified by TurboTax while trying to file our taxes.

How exactly are we supposed to deal with this to avoid penalties? We've obviously stopped our contributions. But what do we do to roll back what was contributed in 2023 and thus far in 2024?

Do we remove all our contributions and transfer them to a traditional IRA?
How do we factor in our gains? Our overall Roth portfolio values each went up ~50k for the year . How is it determined how much of that comes from the invalid contributions made?
Can we just wing it with a generous estimate and transfer like 25k to a traditional IRA? Any tax implications to doing this?
Do we just need to get a CPA and let them figure it out?

Appreciate any guidance!

I don't believe you will be able to re-characterize the 2023 contributions. Usually the only route is to do an excess contribution removal. The broker should be able to calculate the earnings from the excess and remove those too. Typically, there is a 6% penalty for excess contributions if not removed by December 31st of the year in question. If your broker is not any help, a CPA should be.

Edited to add the 2024 contributions will be able to be re-characterized no problem. Usually, you have to have it coded a certain way on your tax forms so a simple withdrawal from the Roth to the Traditional will not work.

Thanks for the responses!

But after reading this article, am I understanding it wrong where we could address 2023 now? Pasting points in question below link.

https://www.investopedia.com/what-to-do-if-you-contribute-too-much-to-your-roth-ira-4770686

1. Withdraw Your Excess Contributions

You won't face any penalties if you simply withdraw your excess contributionplus any income it has earned in the meantimeby the due date for your tax return, including extensions. You will, however, have to include the earnings portion in your taxable income for the year.1
Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)."The technical term for these earnings is net income attributable (NIA).


Note that even if you have already filed your tax return for the year, you can still withdraw the contribution within six months of your tax return's due date (excluding extensions).3

What you will need to do, according to the IRS, is "file an amended return with 'Filed pursuant to section 301.9100-2' written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return."1

2. Recharacterize Your Excess Contributions
Another option is to recharacterize your excess Roth contributions by moving them into a traditional IRA. You can do that by instructing the financial institution that holds your Roth IRA to transfer the excess amount, plus any income it has accumulated, into a traditional IRA either at that same financial institution (a same-trustee transfer) or another one (a trustee-to-trustee transfer).

The IRS says, "If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA)."4

Note that although the Tax Cuts and Jobs Act (TCJA) banned recharacterizing Roth contributions from a traditional IRA or other tax-advantaged accounts, starting in 2018, that does not apply to recharacterizing excess contributions in this situation.

You are correct, I was wrong in my initial post. It looks like you will have until the tax filing deadline (ignoring the 6 month window past the deadline) to remove the contribution. Now whether or not a simple withdrawal will satisfy the removal, I will defer to a tax pro there. That is out of my wheelhouse haha. IRS form 5329 may be helpful, but once again outside my wheelhouse. Good luck!

I did this a few years ago and had to file a recharacterization form with Fidelity. That part was pretty easy and I was able to handle contributions from previous and current calendar year (all contributed for tax year I was filing).

Now getting TurboTax to accept the recharacterization was a whole different ball of wax. They kept trying to get me to enter it as a backdoor Roth, which would obviously be much more common but obviously not what this was. I ended up having to find the form myself and fill it in manually, even after several chats with their "experts". Let me know if you can't find the form and I can look it up for you.

It should be 2 steps. You'll recharacterize the Roth contributions by moving them to a traditional IRA. They should be considered non deductible at that point. Then you can move them to your Roth. That is basically the back door Roth, but you're separating the non deductible contribution and the conversion, possibly between years. I'd have to look more into it to be sure, but if that's the case, you just need to make sure you report the basis correctly on the 8606.

Thank you all.

So, I guess our main question is the estimating the gains to transfer on top of contributions. Assuming we can't get a good number from the broker and we wish to avoid a CPA, could we just over-estimate and be done with it? Like if we contributed 10k total, could we just transfer that plus like 3k to cover gains? Even if we essentially are penalizing ourselves some tax burden-wise?

Pinochet said:

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It should be 2 steps. You'll recharacterize the Roth contributions by moving them to a traditional IRA. They should be considered non deductible at that point. Then you can move them to your Roth. That is basically the back door Roth, but you're separating the non deductible contribution and the conversion, possibly between years. I'd have to look more into it to be sure, but if that's the case, you just need to make sure you report the basis correctly on the 8606.

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Do NOT do this (the backdoor Roth) if you already have an existing IRA (such as a rollover from a 401k at a previous employer).

If you have an existing IRA that contains tax-deferred contributions, you will have to pay taxes on any new contribution you make to a pre-tax IRA, even if it's after-tax money just "passing through" to your Roth. This applies even if you have more than one IRA (the IRS treats them all as one account for tax purposes).

My wife has a traditional from a previous 401 rollover, however I do not.

I was just going to setup a new traditional IRA account - figured I need one anyway since I can no longer contribute to a Roth.

I'm not sure how it works for marrieds, but she can't put any more money in an IRA to do a backdoor Roth conversion without paying taxes on that contribution again. I made this mistake last year. Eventually, you get it back but it's prorated across multiple years of distributions, after you start taking withdrawals. Cost me about $1200 in taxes that I didn't owe.

She can do a mega backdoor Roth through her current 401k (if she has one), if her company allows for it. Since I can't do the backdoor Roth anymore, I've transitioned to this.

TXTransplant said:

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Pinochet said:

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It should be 2 steps. You'll recharacterize the Roth contributions by moving them to a traditional IRA. They should be considered non deductible at that point. Then you can move them to your Roth. That is basically the back door Roth, but you're separating the non deductible contribution and the conversion, possibly between years. I'd have to look more into it to be sure, but if that's the case, you just need to make sure you report the basis correctly on the 8606.

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Do NOT do this (the backdoor Roth) if you already have an existing IRA (such as a rollover from a 401k at a previous employer).

If you have an existing IRA that contains tax-deferred contributions, you will have to pay taxes on any new contribution you make to a pre-tax IRA, even if it's after-tax money just "passing through" to your Roth. This applies even if you have more than one IRA (the IRS treats them all as one account for tax purposes).

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Good point. Thanks for clarifying.

OP - why are you so worried about avoiding a CPA? I literally just helped a new client last week who "avoided a CPA" and it cost him a couple million dollars in tax. He got no cash in the deal. Spend a few hundred dollars on a CPA.

Have you tried getting a number from the broker? Fidelity had mine calculated for me on the recharacterization, I'm pretty sure.

Well, millions aren't at stake and my taxes until this mishap have always been pretty straightforward. Plus, just figured finding a CPA at this time of year wouldn't be easy. But if anyone has any recommendations of someone near Sugar Land I'll certainly look into it.

I'm reaching out to the broker again if they can help get a number, but they indicated I needed a CPA. Maybe I do or maybe they are lazy.

You might not need a CPA but I would at least talk to an enrolled agent. You can probably find a freelance one still taking clients online.

You don't need a local one for your federal taxes so you can cast a pretty wide net and not limit yourself to one you can meet face to face.

They are telling you you need a CPA because most (all?) financial institutions try not to give tax advice for liability reasons. Anytime a CFP has given me tax advice, its always followed with "but check with your CPA before doing this" or something like that.

SJEAg said:

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Well, millions aren't at stake and my taxes until this mishap have always been pretty straightforward. Plus, just figured finding a CPA at this time of year wouldn't be easy. But if anyone has any recommendations of someone near Sugar Land I'll certainly look into it.

I'm reaching out to the broker again if they can help get a number, but they indicated I needed a CPA. Maybe I do or maybe they are lazy.

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I just sent my tax info to Brian Crelin here, they came highly recommended....father / son duo. Brian seems to be a nice guy and was very helpful when I cold-called him last week. Was going to use TT but wasn't confident my K1 entries were correct. They are near Mason and Kingsland, if you call him tell him Clint referred you.

https://crelinandassociatescpas.com/