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At the beginning of last year, I contributed the maximum amount to my Roth IRA, as I typically do. Late in the year, I received a very unexpected and very large bonus. I realized when I got my 1040 this week that the bonus will put me over the MAGI limit for Roth IRA contributions.
What do I do now?
I'm single and do not currently have a traditional IRA or 401K, if any of that is relevant.
I did this myself a few years ago. Best path forward is to call your financial institution managing your Roth and let them know (Vanguard helped me sort out my over-contribution). You'll need to tell them the amount you are allowed to contribute (or conversely the amount of your contribution overage).
Generally they will need to run a calculation and determine how much money to remove from the Roth, which may include some interest earned (so it may be more than your original over-contribution that needs to be removed). They will send you a form with all the relevant info, which may include a tax assessment on the interest earned. You'll probably report that interest on this year's or next year's tax return.
It's not a big deal, just need to get the numbers right.
One option you have is to recharacterize your Roth IRA contribution as a Traditional IRA contribution. Basically this means pretend as if you originally made a Traditional IRA contribution instead of a Roth IRA contribution. There are no income limits for contributing to a Traditional IRA, so it won't be an excess contribution. (There are income limits for deducting a Traditional IRA contribution if your or your spouse is covered by a retirement plan at work, but you are not going to deduct it.)
Then, you would convert all the money in the Traditional IRA to a Roth IRA. There is no income limit for conversions either. (You are basically belatedly doing a "backdoor Roth IRA contribution".) Assuming you had no pre-tax money in IRAs (and won't put any pre-tax money into IRAs this year), during the conversion, the after-tax contribution portion of the Traditional IRA won't be taxed; only the earnings part since you contributed until the conversion (which is probably a very small amount) will be taxed. So the end result is basically the same as what you have now, with no penalties.
