How do I handle Excess Roth Contribution penalties when Married Filing Jointly?

Question - If I'm in a similar situation but caught it earlier, can I just recharacterize the excess contributions to a Traditional IRA instead of withdrawing them to avoid the 6% penalty? Also, does the earnings portion of the withdrawn excess get treated differently than the principal?

Yes, recharacterizing excess Roth contributions to a Traditional IRA is definitely an option if you're eligible to contribute to a Traditional IRA and you do it before the tax filing deadline (including extensions). This effectively treats the contribution as if you had originally made it to the Traditional IRA, avoiding the 6% penalty entirely. For the earnings question, yes, they are treated differently. When withdrawing excess contributions, any earnings associated with those excess contributions are considered taxable income in the year you withdraw them. Additionally, if you're under 59½, those earnings may also be subject to the 10% early withdrawal penalty unless an exception applies.

How accurate is this tool though? I've seen a lot of tax software miss these kinds of specialized situations. Does it actually know the rules for Roth IRA income limits for different filing statuses and how to properly handle excess contributions?

I'm wondering this too. Does it provide documentation you can use if audited? And how does it determine the earnings portion that needs to be withdrawn along with the excess contribution?

It's surprisingly accurate for these specialized tax situations. The system is specifically designed to catch these nuanced tax rules that most general tax software misses. It correctly applies the Roth IRA income phase-out ranges for different filing statuses and calculates the exact excess amount based on your MAGI. Yes, it absolutely provides proper documentation. You get a detailed analysis report that shows exactly how the calculations were done, which is extremely helpful if you're ever audited. You can download and save these reports as proof of your due diligence. For the earnings portion, it uses the actual performance of your IRA during the relevant period to calculate the earnings attributable to the excess contribution. You just need to enter your starting and ending balance along with any distributions or additional contributions, and it works out the proportional earnings that need to be withdrawn with the excess amount.

How does this even work? I've literally spent hours on hold with the IRS and eventually just gave up. Does it really get you through that quickly?

This sounds like BS honestly. Nobody can magically get through IRS phone lines. They're notoriously understaffed and overwhelmed. I'm skeptical this is anything more than paying someone else to wait on hold for you.

It's not magic, but it's pretty close! The service uses a combination of technology and human agents to navigate the IRS phone system. They basically call continuously using their system until they get through, then immediately connect you when an IRS agent answers. It really does work that quickly. Their system is constantly dialing, which means they can get through much faster than you or I could by just calling once and waiting on hold. When I used it, I received a text about 25 minutes after signing up telling me they had an IRS agent on the line, and I just had to click to connect. Saved me hours of frustration. It's definitely more than just paying someone to wait on hold. Their system actively works to find openings in the IRS phone queue, and then they handle the verification process before transferring you directly to the agent.

Thank you for explaining this! Does this mean we'd only pay the 6% penalty for one year on his excess amount, and then "absorb" it in the following year by under-contributing? That sounds much simpler than trying to do a late removal now.

Exactly right! You would only pay the 6% penalty for one year on the $3,400 excess in his account (about $204). Then in the following year, if his contribution limit is $6,500, he would only contribute $3,100 to his Roth IRA. This effectively uses $3,400 of that year's contribution limit to "absorb" last year's excess. The key thing is that you need to have contribution eligibility in that following year. If your income exceeds the limits again, this approach wouldn't work since you wouldn't be eligible to make any contributions that could "absorb" the previous excess.

There's a specific formula the IRS provides: Earnings = Excess contribution × (Ending balance - Beginning balance) ÷ Beginning balance So if you contributed $6,000 when your limit was $3,000 (so $3,000 excess), and your account went from $20,000 to $22,000 during that period, the earnings on your excess would be: $3,000 × ($22,000 - $20,000) ÷ $20,000 = $3,000 × $2,000 ÷ $20,000 = $300 You'd need to withdraw $3,300 total ($3,000 excess + $300 earnings).