How to correctly report Roth IRA contribution and withdrawal when exceeding income limits?

You've got a bit of a mix-up here that needs sorting out. When you contribute to a Roth IRA but exceed the income limits, you have two main options: remove the excess contribution (what you did) or recharacterize it as a Traditional IRA contribution. For your 2023 contribution that you withdrew in 2024: You were right to report the excess on Form 5329, but your basis calculation needs adjustment. Since you completely withdrew the 2023 contribution (plus earnings) before filing, that $1,500 should NOT be included in your basis going forward. Your basis should only include valid contributions that remain in the account. The earnings on your excess contribution ($30) are considered taxable income in the year you withdrew them (2024). You should have received a 1099-R from your brokerage showing this distribution. For your 2024 contribution of $7,000: If you're still over the income limit for 2024, you'll need to address this before the filing deadline as well. If you're under the limit for 2024, then the $7,000 contribution is fine and would be your correct basis. Hope this helps clarify things!

Hey there, I was literally in the same boat last year and found a really helpful resource at https://taxr.ai that saved me tons of headache. I uploaded my tax forms and IRA statements, and they immediately highlighted exactly where I was making mistakes with my excess contribution reporting. The system showed me that I was incorrectly carrying forward my withdrawn contribution in my basis calculation (just like you're doing). It created a personalized explanation of how to properly document both the contribution and the withdrawal on separate forms - Form 5329 for the excess contribution and Form 8606 for tracking IRA basis. What I really liked was how it mapped everything to specific tax form lines with clear instructions. Might be worth checking out if you're still unsure about how to proceed.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. It actually cleared up my Roth IRA reporting confusion completely! I uploaded my tax documents and it immediately identified that I had been incorrectly adding back withdrawn contributions to my basis (exactly what the original poster was doing). The tool gave me step-by-step instructions on how to properly document my excess contribution removal on Form 5329 and showed me that I needed to report the earnings portion on my 1040 as "Other income." It also provided clear guidance on how the timing of my withdrawal (before tax deadline) affected the penalties. What really helped was the side-by-side comparison of my current forms versus how they should be filled out correctly. Saved me from having to amend multiple years of returns incorrectly. Definitely worth checking out if you're dealing with IRA contribution issues.

For anyone struggling with the IRS about excess Roth contributions or trying to get clarity on penalty abatement, I had great success using Claimyr (https://claimyr.com) to actually speak with an IRS agent. I spent weeks trying to get through on my own with no luck. After using their service, I was connected to an IRS representative in about 20 minutes instead of the 2+ hour wait I experienced before. The agent walked me through exactly how to document my excess contribution withdrawal and confirmed I didn't need to amend my previous year's return since I withdrew the excess amount before the filing deadline. They have a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. Basically saves you from the endless hold times when you need to speak with someone directly at the IRS about these confusing retirement account issues.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I needed to talk to the IRS about my own excess Roth contribution situation that was similar to the original poster's. It actually worked exactly as described - I got a call back when they reached an IRS agent, and I was connected directly to speak with them. The agent confirmed that I didn't need to include my withdrawn excess contribution in my basis calculation and explained exactly which forms needed correction. The whole process took about 25 minutes from start to finish versus the 3+ hours I spent on my previous attempt that ended with a disconnection. Honestly wish I'd known about this sooner - would have saved me a lot of frustration during tax season.

One thing nobody's mentioned yet - if you're consistently over the income limit for Roth IRA contributions, you might want to look into the "backdoor Roth" strategy. It's completely legal and lets you contribute regardless of income. Basically: 1. Contribute to a Traditional IRA (no income limits for contributions, though deductibility varies) 2. Immediately convert to Roth IRA 3. Report appropriately on Form 8606 This avoids the whole excess contribution problem. Just be aware of the pro-rata rule if you have existing pre-tax money in any Traditional IRAs.

Just a heads-up based on personal experience: be VERY careful with your record keeping if you're doing Roth corrections or backdoor contributions. I messed up my basis tracking over multiple years and got hit with a CP2000 notice claiming I owed taxes on conversions that should have been tax-free. It took me months to untangle everything because I didn't have proper documentation for which contributions had been withdrawn as excess vs. which ones were converted properly. Make sure you keep ALL your 5498 and 1099-R forms indefinitely!

Based on your description, it sounds like you handled the excess contribution removal correctly by withdrawing before the filing deadline, which should have avoided the 6% penalty. However, there are a couple of areas that need attention: Your basis calculation is indeed incorrect. Since you withdrew the entire 2023 contribution of $1,500, that amount should NOT be included in your ongoing basis. Your basis should only reflect contributions that remain in the account - so for 2024, it should just be $7,000 (assuming you're eligible for the 2024 contribution). You should have received a 1099-R for the 2024 withdrawal showing the $1,530 distribution. The $1,500 principal portion isn't taxable since it was a return of excess contributions, but the $30 in earnings should be reported as taxable income on your 2024 return. If you're under 59½, those earnings are also subject to the 10% early withdrawal penalty. Make sure your IRA provider coded the 1099-R correctly - it should show code P or JP in box 7 to indicate "return of excess contributions." This helps the IRS understand the nature of the distribution. For 2024, double-check that your income still qualifies you for the $7,000 Roth contribution. If you're over the limit again, you'll want to address this before the filing deadline to avoid repeating the same issue. You likely don't need to amend your 2023 return if you properly reported the excess on Form 5329, but you should verify that your 2024 return correctly reports the earnings portion of the withdrawal as taxable income.