Hello,
At the beginning of the year, I made the max contribution to my ROTH IRA.
I wasn’t thinking about this account and did a big Roth conversion. With the Roth conversion and with my full time salary, I will easily exceed the Roth income limit.
What should I do? Just pay the penalty if there is one? take out the 2026 $7500 contribution I already made?
So this is a 2026 contribution, right?
You have until April 15, 2027 to take out the $7500 and the earnings on that $7500. (You should probably let the administrator figure the earnings, since the earnings are pro-rated based on the earnings for the entire account balance for the dates the excess contribution was in the account.) If you are under 59 1/2, you will pay a 10% penalty on the earnings. If you are under 59 1/2 and have not had a Roth IRA open for at least 5 years, you also pay ordinary income taxes on the earnings.
If you leave the excess contribution in the account, you will pay a 6% penalty each and every year until the $7500 can be counted as a contribution - so it may not be just a 1 year thing, if your income is higher next year for some reason.
Edited to add:
I will note that if the account has losses instead of gains starting with the date that you made the contribution until you take the contribution back out, you won’t end up paying any penalty or taxes, because there are no gains to penalize and/or tax. However, you won’t get a deduction for the loss, either. So if you think it is likely that you will end up with losses in the account before April 15, 2027, you could let it ride until the last few days. (I would recommend always giving a couple of weeks to accomplish the withdrawal, especially at that time of the year.) However, letting it ride could result in even larger earnings than you currently have, which would mean a larger hit from penalties and taxes. So using this strategy successfully depends on how accurate you expect your market timing to be.
If it were me, I would probably pull an excess 2026 contribution out sooner rather than waiting, because my crystal ball gets very cloudy when trying to time the market. The penalty and taxes paid will only be on the earnings, so if you’ve had $500 in earnings attributable to the $7500, you will end up paying $50 penalty plus taxes at your marginal rate.
AJ
With the usual caveats that I’m not a tax advisor and that you should not trust everything you read on the internet …
This is from a post on the paid side of the boards:
There is actually a specific modified AGI to determine if you can make a regular Roth contribution. Any Roth conversion amounts are subtracted and do not count toward modified AGI for Roth contribution limits. Please see the worksheet 2-1, Line 2, in the IRS publication 590-A :
https://www.irs.gov/publications/p590a#en_US_2025_publink1000230985
Wow!!! This looks like it is indeed correct. To determine the MAGI for Roth eligibility, you subtract IRA conversions (for other uses of MAGI, you DO NOT subtract them).
Yes, I had forgotten about this particular MAGI adjustment. Sorry about that!
AJ
Thanks Guys…
Looks like I am safe…whew…