I traded frequently in 2025, racking up some big capital gains. However, I had some decent sized losses too which I sold at the end of the year to bring down my tax burden. I am just now realizing that most/all of the losses will be treated as wash sales because I frequently traded the same stocks in my Roth IRA as well. Trying to put my ducks in a row in how to deal with the fallout, which seems will cost me tens of thousands.
1) I maxed out my Roth IRA contribution for 2025, but it now appears my total income will exceed the $236,000 limit. Who/when should I reach out to rectify that situation?
2) I have received underpayment penalties at tax time the past 3 years based on not paying enough quarterly payments to keep up with my capital gains. It looks like this year's penalty could be big. Should I try to offset this with a big quarterly payment before Jan. 15? Could that even qualify for the safe harbor rule, even though it is all lumped in the 4th quarter?
3) Assuming that I pay off my full tax bill + penalties to the IRS by April 15, could I be in any legal trouble based on the IRA over-contribution or based on the large quarterly underpayment?
Thanks, I'm stressing out about this …
Posted by Financial-Mud-2433
1 Comment
Roth overcontribution: You can recharacterize the contribution and associated earnings to tradIRA, then convert it back to Roth (paying tax on those converted earnings). Works best if you have no money in any tradIRAs before recharacterizing, including rollover IRAs, SEP-IRAs, and SIMPLE-IRAs (but not inherited IRAs). Alternatively, you can do a return of excess contribution and remove the contribution and associated earnings, paying tax on those earnings.
Underpayment penalty: Yes, making an estimated payment now will stop the penalty from accruing further. No, you won’t qualify for safe harbor, unless you were on-track to meet the safe harbor before September. When you prepare your return, I suggest letting your software calculate the underpayment penalty, making a note of the amount, and then remove the penalty; the IRS may or may not bother sending you a bill for that penalty.
Legal: I’m not a lawyer, but I’m not aware of any legal issues here, no.