How to remove excess Roth IRA contributions penalty free

Last week, I suddenly realized that because we sold so much stocks to put a downpayment on our home, we probably hit the Roth IRA annual income limit for 2020.

Because something like this has never been a realistic issue for me in the past (as you might guess from the whole premise of me living and saving on very medium salaries in NYC), I had the habit of doing my Roth contributions in January of every year so that it had the whole year to grow. Unfortunately, because of the unexpected situation (we had no intention of ever buying a home until the day before we put in the offer), the income limit became a real issue.

For those of you wondering, here are the income limits (MAGI – Modified Adjusted Gross Income) for Roth IRA contributions for 2020:

  • Single: $139,000
  • Married (Filing Jointly): $206,000

You can read more nuanced text on the limits and phase-out here: Roth IRA Contribution Limits.

Having sold around $150,000 in stocks that had gains of about $78,000 meant that with my freelance income and my husband’s day job, we were over the Roth IRA income limit for 2020.

How do I remove excess Roth IRA contributions?!

As I tend to do when. I come across a financial situation and I panic, I sent up the bat signal on Twitter, and thanks to everyone’s help, my issue was resolved with a quick phone call (quick other than the 25 minute wait).

While my steps are specific to Vanguard, I’ve heard that it’s very similar at other institutions. My husband also just requested a contribution withdrawal. In his case, he didn’t invest the funds yet, which means the process will be even simpler for him. (He’d just have to withdraw the contribution, and not worry about the gains/losses.)

What is “excess Roth IRA contribution”?

First thing first: Excess Roth IRA contribution occurs when you make a Roth IRA contribution into your retirement account when you are not eligible to.

This may have happened because you made too much that year. Or, you could have also just contributed too much due to a calculation error. Perhaps you didn’t realize you can only contribute a certain amount across ALL IRAs (traditional AND Roth).

Whatever the reason may be that lead to this error, the IRS knows that this happens often, so there are ways for you to rectify your mistakes.

Sometimes, you need to pay a penalty for early withdrawal (since Roth IRA is a retirement vehicle, you are required to pay an early withdrawal penalty before 59.5 years old in most cases). But sometimes, as I found out, you don’t!

Regardless of whether you need to or not need to pay a penalty, you WILL need to pay income tax for whatever gains your contribution had between the time you made the contribution and when you realized your mistake and pulled the contribution out.

Ways to fix excess Roth IRA contributions

There are a few ways to “fix” this contribution error. This article from Investopedia is great resource that explains the nuances and different ways to fix your mistake.

Because I don’t anticipate our income going down, and I want to just get the issue resolved, I went with this option:

  • Remove the excess contribution and gains from your Roth IRA account, pay taxes on the gains, and potentially pay the excess contribution penalty

Whatever you choose to do… Call up the financial institution you have your Roth IRA account with, and ask for support or advice!

Removing excess Roth IRA contributions with Vanguard

According to the support agents on the call, because I caught my mistake before “the tax deadline” (aka, next April), I will not have to pay a penalty.

Instead of giving me a “distribution” which requires me to pay a penalty, it’ll be “removal of excess contribution.” Though the difference seems trivial to us, it means that since it’s not a “distribution,” I just have to pay income tax on the gains. Score!

  • Call Vanguard at 800-284-7245 or 877-662-7447 (be ready to be on hold for a while)
  • Explain the situation and ask to remove your contribution and cash out the gains because you’ve made excess contribution to your Roth IRA
  • They’ll begin the process on their end, and will send you eDocs (IRA and ESA excess contribution removal form) to review and sign
  • You’ll have to sell ETFs (or whatever you’ve bought) so that you have at least the contribution value and the gains in cash in that account
  • For the gains, they may ask you to call back after a few days, after they’ve made the calculation, or you can do a guestimation with them on the spot and sell the investments
  • You have the option of having paper checks sent to you or direct deposits; they’ll send out 2 checks/deposits: one for the contribution, and another for the gains
  • You can choose whether you want them to withhold taxes or not; if you ask them to withhold, be prepared to give the “federal” and “state” tax amounts you want withheld
  • They’ll do the rest and you should see a check or direct deposit once your investments are liquidated and you have enough cash for them to finish off the paperwork!

Few things to note…

  • Because your Roth IRA contributions are POST tax, you do not need to pay taxes on the excess contribution
  • You WILL have to pay regular income tax on your gains for the year for those excess contributions (institution will help you calculate your gains)
  • If you realize and resolve the issue before the next tax filing, you’ll likely be able to opt to “remove excess contributions” instead of “take a distribution,” which will save you from having to pay early withdrawal penalty
  • Also, seems like you have to pay a fee to have the agent do the transaction on your behalf over the phone, so I opted to have them be there on the phone and guide me as I clicked “sell” on the Vanguard portal!

As always, talk to your accountant, financial advisor, or the financial institution you have your retirement account at! But if you, like me, realized you’ve made a mistake, I hope this article helped to assuage your anxiety!


  1. Jeff Sabotin

    Thank you for your article. This is the exact situation that I find myself in this year. Very detailed information that is so helpful. Thank you for doing this.

  2. Michael Jones

    I too am in the same situation from selling some residential investment real estate. Ugh. What you didn’t say was that on the earnings what was the timing of the 1099-R you got from Vanguard? I’m struggling a little bit to figure out where to report it so I can pay the 10% penalty and the taxes and move on with my life!

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