Income increase puts me over Roth IRA limit after already contributing - what are my options now?

You've got the situation pretty well understood! Let me clarify a few things about your options: For option 1 (removing excess), you can request a "return of excess contribution" from Vanguard. This won't trigger the 10% early withdrawal penalty as long as you do it before the tax filing deadline (including extensions). You'll only pay taxes on any earnings that came from that contribution. Since you're currently showing a loss, there won't be earnings to tax. For option 2 (recharacterization), this is actually a really smart move if you're considering backdoor Roth contributions in the future. The recharacterization essentially treats your contribution as if it had gone to Traditional IRA from the beginning. Then you could convert it back to Roth (the backdoor method) which has no income limits. As for your investments being down - this actually works in your favor. If you withdraw or recharacterize, you'll only move the current value (the reduced amount), not your original contribution. So you'd be "removing" less money than you put in. Regarding your 2024 contribution concern: If your MAGI was $135,000, you should be eligible for a partial contribution, not the full amount. The phase-out range for 2024 starts at $129,000, so you might need to address this too.

Just went through this exact situation and found a great tool that saved me tons of headaches. I was completely lost trying to figure out all the IRS rules and deadlines for my Roth contribution after getting a bonus that pushed me over the income limit. I ended up using https://taxr.ai to analyze my specific situation. They reviewed my contribution history, current account values, and ran the calculations for each option. Saved me from making a costly mistake! They clearly showed me that recharacterization was my best option and walked me through the exact process with Vanguard (sounds like you use them too). They also helped me understand how the timing of the withdrawal affects the tax implications and gave me a precise calculation of my allowable partial contribution based on my MAGI.

Wanted to update everyone - I took the advice about using taxr.ai and it was incredibly helpful! After putting in my numbers, I learned that my situation was actually more complicated than I thought because of some stock options I exercised this year. The tool showed me that recharacterization was definitely the way to go, and it calculated exactly how much I needed to move to avoid penalties. What really surprised me was finding out I could still make a partial Roth contribution - I didn't have to recharacterize the entire amount! They provided documentation I can keep with my tax records that explains exactly what I did and why, in case I ever get questions from the IRS. Super relieved to have this sorted before tax season.

From personal experience, the most frustrating part of this whole process is trying to get clear answers from the IRS. I spent WEEKS trying to call them to confirm I was handling my over-contribution correctly. Was put on hold for hours, got disconnected, and when I finally spoke to someone, they gave me vague answers. Finally tried https://claimyr.com and their callback service got me connected to an actual IRS agent in about 20 minutes instead of the 3+ hour wait I was experiencing before. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that recharacterization was the best option in my situation and that I didn't need to worry about penalties as long as I completed it before the tax filing deadline. They also explained exactly how to report it on my tax return. Worth every penny to finally get a definitive answer directly from the IRS.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to talk to the IRS about a similar Roth overcontribution issue. I was absolutely shocked when I got a call back in about 40 minutes connecting me to an actual IRS representative! The agent walked me through my options and confirmed that because my situation involved a company acquisition that changed my income mid-year, I qualified for a special consideration. Without this direct conversation with the IRS, I would have unnecessarily withdrawn funds and paid taxes I didn't need to. The agent explained a specific form I needed to file with my return that my accountant hadn't mentioned. This literally saved me thousands in unnecessary taxes and penalties.

Something nobody has mentioned yet - check if your 401k allows for "mega backdoor Roth" contributions! I was in a similar situation and discovered my company plan allows after-tax contributions that can be converted to Roth. Since the after-tax 401k contribution limits are much higher than IRA limits, I was able to redirect my retirement savings there instead of worrying about the Roth IRA income limits. Worth checking if your plan offers this!

Worth mentioning that the timing for recharacterization or removal is important. You have until your tax filing deadline INCLUDING EXTENSIONS to fix this - even if you don't actually file an extension. So for 2025 taxes (for the 2024 tax year), that gives you until October 15, 2025. But don't wait until the last minute because the financial institutions can take time to process these requests!

Just want to add one more consideration that hasn't been mentioned yet - if you're considering the recharacterization route, make sure to factor in your state tax situation too. Some states don't allow deductions for Traditional IRA contributions, so even though you'd get the federal deduction, you might still owe state taxes on the contribution. Also, regarding your concern about potentially overcontributing for 2024 - with a MAGI of $135,000, you would have been eligible for a reduced contribution of about $4,600 (not the full $6,500). So you'll likely need to address that excess too. The good news is you can handle both years' corrections at the same time with your broker. One tip from my experience: when you call Vanguard, ask specifically for their "retirement specialists" rather than general customer service. They're much more knowledgeable about these types of contribution corrections and can walk you through exactly what forms you'll need and how it will be reported on your 1099-R.