Whether you have accidentally contributed too much to your Roth IRA or found yourself needing money now rather than at retirement, you can undo your Roth IRA contribution for the year. However, it's not quite as easy as just asking for your contribution back and you might incur extra taxes and penalties as a result.
To cancel a Roth IRA contribution, you have to take out what you contributed plus any earnings accrued while the money was in the Roth IRA. If you lost money, you only have to withdraw your contribution minus the losses. For example, say you contributed $3,000 and now you want it back, but while it was in the Roth IRA, that $3,000 grew to $3,150. You must withdraw $3,150 to undo the Roth IRA contribution.
You can only cancel your Roth IRA contribution up to your tax filing deadline for the year, including any extensions you receive to file. If you don't receive an extension, the deadline is typically April 15, while the standard six-month extension pushes the deadline back until Oct. 15. For example, if you want to undo your contribution for the 2012 tax year, you have to remove the contribution and any earnings by April 15, 2013 if you don't file for an extension, or Oct. 15, 2013 if you do file for an extension.
The withdrawal of your contribution won't count as taxable income, but any earnings you take out do. For example, if you contributed $3,000 and had to withdraw $3,000 plus $150 of earnings, that $150 of earnings counts as taxable income. In addition, if you're not 59 1/2 years old, those earnings are also hit with the 10 percent additional tax on early withdrawals.
If you're wanting to undo your Roth IRA contribution because you realize you're no longer eligible because of your income, but you could still contribute to a traditional IRA, consider recharacterizing your contribution. To do so, you just need to fill out the recharacterization form from your financial institution and the contribution, plus any earnings, will be moved to a traditional IRA. This allows you to avoid the early withdrawal penalty if your contribution has earned money while in the account.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."