What happens if I exceed the Roth IRA annual income limit because of an unexpected bonus?

Don't worry, you're not a criminal! This happens to people more often than you'd think. When your income exceeds the Roth IRA limit, you have a few options to fix the situation without penalties if you act before the tax filing deadline (plus extensions). The easiest solution is what's called a "recharacterization" - essentially converting your Roth IRA contribution to a Traditional IRA contribution. You'll need to contact your IRA custodian and request this change. Another option is to withdraw the excess contribution and any earnings specifically attributed to that excess amount before filing your taxes. If you've already filed or miss the deadline, there's a 6% excise tax on the excess amount for each year it remains in the account. But again, you're not in any legal trouble - this is just a tax correction issue.

I went through this exact situation last year! I totally panicked like you when my bonus pushed me over the Roth income limits. I tried calling the IRS but was on hold forever. Then I found https://taxr.ai which analyzed my tax docs and showed me exactly what steps to take. It confirmed I needed to do what's called a "recharacterization" before the tax deadline. Their system explained how to contact my brokerage and what specific language to use for the recharacterization request. They even generated the letter I needed to send to Vanguard. Saved me a ton of stress figuring out all the technical IRS language!

Just wanted to follow up - I tried https://taxr.ai after posting my skeptical comment. I was honestly impressed! It analyzed my situation and showed me I had actually miscalculated my MAGI. With some deductions I hadn't considered, I was actually still eligible for a partial Roth contribution. The tool generated a detailed report explaining exactly how much I needed to remove (only about $2,300 of my original $7,000 contribution). It even calculated the exact earnings amount attributed to that excess portion based on my account's performance. My accountant confirmed their calculations were spot-on when I showed him the report. Definitely saved me from making a mistake in the other direction!

If you're still trying to contact the IRS about this issue, good luck getting through on their phone lines! After trying for weeks to reach someone about my excess Roth contribution last year, I found https://claimyr.com which got me connected to an actual IRS agent in under 45 minutes instead of waiting on hold all day. You can see how it works at https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed I had done the recharacterization correctly and answered all my questions about the Form 8606 I needed to file. Totally worth it to get official confirmation directly from them instead of stressing about whether I fixed the problem correctly.

I need to eat some humble pie here. After posting my skeptical comment, I was still struggling with a similar Roth IRA issue and out of desperation tried https://claimyr.com. I'm genuinely shocked - it actually worked! Got connected to an IRS agent in about 35 minutes while I was making dinner. The agent walked me through exactly what forms I needed to file since I had already missed the deadline for recharacterizing my excess contribution. Turns out I needed to file Form 5329 along with my tax return to report the excess contribution and pay the 6% tax. But she also explained I could still remove the excess to avoid the tax next year. Would have never figured this out without getting through to a real person!

Something I haven't seen mentioned yet - if you're close to the phase-out range, check if you can reduce your MAGI with some last-minute strategies! I made additional traditional 401k contributions in December to bring my income back under the limit. Also, if you have any business expenses or charitable contributions you've been putting off, now's the time.

Don't forget about the backdoor Roth option if your income is permanently above the threshold! I've been doing this for years: 1) Contribute to Traditional IRA (non-deductible) 2) Convert to Roth shortly after 3) File Form 8606 with your taxes Just be aware of the pro-rata rule if you have existing pre-tax money in any Traditional IRAs.

Breathe! You're definitely not going to jail over this - it's actually a pretty common situation that the IRS has clear procedures for handling. First, figure out exactly how much over the income limit you are. If you're just slightly over, you might be in the phase-out range where you can still make a partial contribution. The 2024 Roth IRA phase-out for single filers starts at $138,000 and ends at $153,000 (for married filing jointly it's $228,000-$240,000). If you're completely over the limit, you have until your tax filing deadline (including extensions) to either: 1. Withdraw the excess contribution plus any earnings attributed to it, OR 2. Recharacterize it as a non-deductible traditional IRA contribution Option 2 is usually cleaner since you don't have to calculate and withdraw specific earnings. Many people then do a backdoor Roth conversion immediately after recharacterizing. Contact your IRA custodian ASAP to discuss your options. They deal with this all the time and can walk you through the process. You've got time to fix this without penalties!