I'm dealing with correcting an overcontribution to a Roth IRA due to income limits, and my head hurts. Here's the gist of my problem.
I contributed $5500 to my Roth in 2016. In March 2017, I went to file my taxes and discover based on my MAGI of $126K, I could only contribute $2200. Ok, no problem. I call my account holder, explain that I've over-contributed for 2016, and have them remove $3300 plus earnings. Now I just have to deal with the 10% early distribution on the earnings, right? I know I'll get a 1099-R and deal with it when it arrives.
Not so fast! In March 2018 (one year later), I receive my 1099-R, and find out when I go to enter it, that the earnings were taxable on my 2016 taxes, filed in 2017. The market was good and my earnings were $1000. So now my MAGI for 2016 is $127K, and my Roth limit was actually $1833. Despite trying to fix everything, I overcontributed by $367 in 2016 (not to mention I have to amend my 2016 taxes to pay the taxes on the earnings).
Obviously this settles eventually and had I known the earnings on an excess distribution were due in the year of contributions, I could have stopped the game by withdrawing sufficiently enough to offset the contribution limit change from the increased MAGI, but is this really how it works? I hope I'm missing something.