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Me and my wife maxed out our Roth IRA contributions for tax year 2022. Few months ago, we both switched to new jobs. Now, our combined income puts us above the income limit to contribute to Roth IRA.

When attempting to undo the contribution, I read that we should account for any gains or losses. That calculating loss part is the problem for me. How can I distinguish losses realized by the contributions made in the prior year vs this year? I have bought/sold positions multiple times this year and I don't understand how to determine how much loss was realized just for this year's contribution. Any advice?

For example: let's say I had 13k in my Roth IRA on Jan 1, 2022 (12K contributions for the past two years and 1K in gains. Of the 13k, 2k is cash and rest is in stock). On Feb of this year, I contributed 6K for the year 2022. With 8K available cash in my Roth IRA, I bought stocks and had realized a gain of $500. I also sold positions that I had bought a couple of years back for 1K profit. At this time my IRA had 22.5K (5K stocks, 17.5 cash). I bought other positions with the cash, those stocks didn't do well, and sold for loss. The current valuation of my account is 11k.

In my scenario (for requesting return of excess), how can I distinguish between the losses realized by current year's contributions vs prior year contributions?

How do I request a return of excess in this kind of situation?

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  • The custodian should do this for you
    – littleadv
    Commented Sep 7, 2022 at 20:28
  • My custodian is eTrade. When I called the customer service inquiring about how to undo my contributions, the person asked me I have to calculate the loss and request disbursement of remaining funds.
    – haku
    Commented Sep 7, 2022 at 20:32
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    Ask about "excess contribution withdrawal" process. Excess contribution is the key, it's not just a disbursement - it's a very specific type of operation. And part of it is calculating the gains/losses on the excess amount, and the custodian should do that. If the person you're talking to doesn't know this - escalate.
    – littleadv
    Commented Sep 7, 2022 at 20:37
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    You can also recharacterize into traditional IRA contribution, by the way
    – littleadv
    Commented Sep 7, 2022 at 20:37
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    I think you misunderstood. Recharacterizing means treating your Roth contribution as if it was traditional from the beginning. What you're planning is a backdoor Roth conversion: you're contributing to traditional and then roll-over to Roth. You can do this after recharacterization since your contribution will be Traditional from the beginning after that and you can roll it over back to Roth. Recharacterization and rollover are different things.
    – littleadv
    Commented Sep 7, 2022 at 20:44

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The Publication 590-A section "Excess Contributions Withdrawn by Due Date of Return" (which is about Traditional IRA but should apply equally to Roth IRA) says,

In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3.

Worksheet 1-3 is used to figure out the amount of earnings that needs to be taken out in a recharacterization (except that in your case it's a return of excess contribution). I believe it divides earnings, that were made during the period the excess contribution was in the IRA, proportionally between the excess contribution and the starting value of the IRA on the date of the contribution.

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