Can my capital gains push me over the Roth IRA contribution limit?

Yes, capital gains absolutely count toward your MAGI (Modified Adjusted Gross Income) which determines your eligibility for Roth IRA contributions. The 2025 income phase-out range for single filers is $146,000-$161,000. Since your combined income is around $190k ($125k salary + $65k capital gains), you're completely over the limit. You have a few options: 1) You can withdraw the excess contributions and their earnings before the tax filing deadline (plus extensions). 2) You can recharacterize your Roth contributions to Traditional IRA contributions (then potentially do a backdoor Roth conversion). 3) You can apply the excess contributions to next year, but you'll still pay a 6% excise tax on the excess amount for this year. The best approach for most people in your situation is to recharacterize to a Traditional IRA and then do a backdoor Roth conversion if you're eligible.

I hit the same issue last year when I had an unexpected capital gain from selling some property. Check out https://taxr.ai - it saved me so much stress when figuring out my recharacterization. The tool analyzed my tax situation and gave me a step-by-step plan to fix the excess contribution without penalties. It also helped me understand how different types of income affect Roth eligibility, which I honestly had no clue about before.

Just wanted to update on my experience with taxr.ai after seeing it recommended here. Honestly wasn't expecting much, but it totally simplified the recharacterization process for me. I uploaded my previous tax return and investment statements, and it immediately flagged that I had similar issues with excess contributions due to my consulting income pushing me over the limit. The tool generated a custom letter to send to my brokerage for the recharacterization and walked me through the exact timing to avoid the pro-rata rule complications. My situation was pretty complex with multiple income sources, but it handled everything perfectly. Saved me from what would have been a massive headache!

For anyone who's tried calling the IRS to get clarification on Roth recharacterization rules - good luck getting through! I spent HOURS on hold trying to confirm the proper procedure. Finally tried https://claimyr.com after seeing it mentioned somewhere, and they got me connected to an actual IRS agent in 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how to handle my excess contributions and confirmed the deadline details. So much better than the endless hold music.

I have to admit I was dead wrong about Claimyr. After being completely annoyed with my failed attempts to reach the IRS about my excess contribution situation, I reluctantly tried the service. I was 100% convinced it was going to be a waste of time and money. Boy was I wrong. Got connected to an IRS agent in about 25 minutes who confirmed exactly how to handle my recharacterization and the timeline requirements. The agent even gave me specific guidance on form 8606 reporting that I hadn't seen mentioned anywhere online. Saved me hours of frustration and potentially costly mistakes. Not sure how they do it, but it actually works.

Another option nobody's mentioned is that you could do a "return of excess contributions" instead of recharacterizing. You'd remove the excess $4,680 plus any earnings on that amount before your tax filing deadline. The earnings would be taxable for the year you made the contribution, and if you're under 59.5, there's a 10% early withdrawal penalty on those earnings (not on the contribution amount you're removing). Some people prefer this if they don't want to deal with the backdoor Roth process or if they have existing Traditional IRA balances that would complicate things due to the pro-rata rule.

Quick question - I'm trying to figure out if I'll have the same problem this year. Does anyone know exactly what line items on the tax return are used to calculate the MAGI for Roth contribution purposes? Is it just AGI or are there specific add-backs?

I went through this exact same situation two years ago when I had unexpected stock options vest. One thing to be really careful about is the timing - you have until your tax filing deadline INCLUDING extensions to fix this. So if you file for an extension, you have until October 15th to complete the recharacterization or withdrawal. Also, make sure you understand what "earnings" means for the withdrawal calculation. It's not just any gains in your account - it's specifically the proportional earnings attributable to the excess contribution amount. Your brokerage should be able to calculate this for you, but double-check their math because I've seen them get it wrong. If you do go the recharacterization route, make sure you get written confirmation from your brokerage that they've processed it correctly. I had to follow up three times with mine to make sure all the paperwork was filed properly with the IRS.

This is a really common issue that catches people off guard! I went through something similar when I had a big bonus year that pushed me over the limit. One thing I'd add to the great advice already given - if you decide to do the recharacterization route, ask your brokerage about the exact process for reporting this on your tax return. You'll need to file Form 8606 if you recharacterize to a Traditional IRA, and the timing of when you make the recharacterization request can affect which tax year it applies to. Also, some brokerages are faster than others at processing these requests, so don't wait until the last minute if you're going that route. The backdoor Roth conversion is definitely worth understanding even if you don't use it this year - it's a valuable strategy for high earners going forward. Just make sure you understand the pro-rata rule implications if you have existing Traditional IRA balances from old 401k rollovers.

Just wanted to chime in as someone who dealt with this exact situation last year. The capital gains surprise is so frustrating - I had no idea they counted toward the income limits either until my tax software flagged it. One thing I'd recommend is acting quickly once you decide on your approach. I initially thought I had plenty of time since the deadline seemed far away, but the recharacterization process with my brokerage took almost 3 weeks to complete. They had to calculate the earnings attribution, get supervisor approval, and then submit all the paperwork to the IRS. Also, if you're considering the backdoor Roth route for future years, it might be worth talking to a tax professional about whether you should roll your existing Traditional IRA balances into a current employer's 401k first (if your plan allows it). This can help you avoid the pro-rata rule complications down the road. The silver lining is that this is a "good problem to have" - your investments did well! Just an expensive lesson in tax planning for higher income years.