Congrats, this is an exciting problem to have!
Since you haven't filed yet for 2021, you have two options, one of which is exactly what you guessed:
- Withdraw the contributions plus the earnings. As long as you do it before you file your taxes for 2021, there will be no penalties. You will have to pay taxes on any earnings beyond the $12K. Note, you may be able to open a regular taxable brokerage account with your IRA custodian and transfer the positions to that account without selling and re-purchasing.
- If you wish to contribute to a Traditional IRA you should be able to "Recharacterize" the contribution(s) as if it were made to the Traditional IRA. Note that if either you or your spouse has a retirement plan at work you won't be able to deduct the contributions. However, the non-deductible (after-tax) IRA can be rolled back into a Roth, so this may be your best course of action based on your original intent. Note the "Backdoor Roth" has some additional caveats that could affect your decision to do this.
Regardless of what you choose, you'll need to contact your IRA custodian to fill out the proper forms. I'd give them a call. They'll also be able to talk through the options for a non-deductible IRA and moving it back into the Roth, if you choose to go that route.
Side note: you mentioned:
We will likely exceed $208,000 this year, which means that we shouldn't be entitled to any Roth IRA contribution.
There is no rush on this. You can do all of this up until you file (before April 15, 2022). You might as well wait until the end of the year or whenever you know for sure that you'll exceed the amount.
For reference, here is the relevant rule from the IRS in Pub 590-A:
Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
Note that if you dig into it, a few paragraphs up from that quote in Pub 590-A, it says "A 6% excise tax applies to any excess contribution to a Roth IRA." That sounds scary by itself, but don't worry, the quoted text takes precedence over that if you withdraw before you file, because all of the funds are "treated as an amount not contributed" and therefore the 6% rule does not apply.