Calculating Earnings for Timely IRA Excess Removals and Recharacterizations
By Kristiana Rodriguez, CIP
The deadline for removing 2024 excess contributions and completing recharacterizations is on the horizon. An IRA owner has until his tax return due date, plus extensions, to remove an excess contribution or recharacterize a 2024 contribution. If the IRA owner files a timely tax return, an automatic six-month extension applies. For calendar-year taxpayers, the deadline to remove a 2024 excess contribution or to recharacterize a 2024 contribution is generally October 15, 2025.
NOTE: Taxpayers with extended tax deadlines will have until the later of their tax return due date or October 15, 2025, to remove a 2024 excess contribution or to recharacterize a 2024 contribution.
To correctly remove the excess and avoid a penalty, or to properly recharacterize a contribution, the net income attributable (NIA) to the contribution must be calculated and removed from the IRA if an excess, or included with a recharacterized contribution. The NIA is the amount of gain or loss that we must attribute to the contribution being removed or recharacterized .
IRA owners must use an IRS-approved formula to determine the NIA, starting on the date that the contribution was made and ending on the date that the contribution is removed or recharacterized. The NIA calculation must be performed on the IRA containing the contribution, and the actual distribution must be made from that IRA.
To understand what recharacterizations and excess contributions are and how to report them, see our articles on the topic.
How is NIA Calculated?
Treasury regulations provide the following formula for calculating NIA.
Some financial organizations have online tools that calculate the NIA for them, but learning to do the calculation manually is helpful, especially when that system function is “down”, as computer-based systems can be.
NIA Calculation Definitions
NIA: The net income attributable to the contribution (earnings or losses).
Contribution: The amount being removed as an excess contribution or recharacterized.
Computation Period: The period beginning immediately before the particular contribution is made to the IRA and ending immediately before the distribution or recharacterization of the contribution.
Adjusted Opening Balance: The IRA’s fair market value (FMV) at the beginning of the computation period, plus any contributions made to the IRA during the computation period (including rollovers, transfers, and the contribution that is being distributed or recharacterized).
Adjusted Closing Balance: The IRA’s FMV at the end of the computation period, plus any distributions taken from the IRA during the computation period (including rollovers, transfers, and recharacterizations).
Total Earnings: The net income earned on the entire IRA (calculated by subtracting the IRA’s adjusted opening balance from the adjusted closing balance), reduced by any applicable loss of earnings penalty (e.g., for a premature withdrawal from a time deposit).
NOTE: If an IRA asset is not normally valued on a daily basis, the FMV at the beginning of the computation period is deemed to be the most recent, regularly determined FMV.
NIA Calculation Example: Lisa, age 40, is single. Her eligible compensation is $3,500. She made a $7,000 Roth IRA contribution on May 12, 2024. On August 16, 2025, she withdraws $3,500 as an excess contribution. Lisa has one IRA investment that pays dividends quarterly, she has made no other contributions or distributions, and there is no loss-of-earnings penalty. The beginning balance of her IRA on May 12, 2024, before her contribution was $41,758.21. The IRA balance on August 16, 2025, is $48,937.72.
Contribution to be withdrawn: $3,500.
Computation period: May 11, 2024, through August 16, 2025.
Adjusted opening balance: $48,858.21 ($41,758.21 + $7,000 = $48,758.21)
Adjusted closing balance: $48,937.72 ($48,937.72 + 0 = $48,937.72)
Total earnings: $179.51 ($48,937.72 - $48,758.21 - $0 = $179.51)
$3,500 x $179.51 = $12.89 NIA
$48,758.21
The IRS provides Worksheet 1-4 in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), to assist in the calculation of net income. Here is the same example above using the IRS provided chart.
Worksheet 1-4. Determining the Amount of Net Income Due to an IRA Contribution and Total Amount To Be Withdrawn From the IRA
NIA FAQs
Can NIA be negative?
The NIA calculation may result in a negative number, which the IRS permits. If this occurs, subtract the negative NIA from the excess contribution or recharacterization amount and reduce the distribution to reflect the loss of earnings.
Example: If the contribution being withdrawn or recharacterized is $300 and the NIA is -$25, the distribution will be $275.
What if one IRA holds multiple IRA investments?
If an IRA holds more than one investment, the NIA calculation must be done for the entire IRA, not just the investment holding the contribution. The NIA calculation for excess removals and recharacterizations is IRA specific, not investment specific.
How is NIA calculated when multiple contributions are made to an IRA?
For a timely removal of excess, the last regular contribution is deemed to be the excess contribution. If multiple regular contributions make up the excess amount, contributions are deemed to be removed in the order of “last in, first out.” The specific contribution that is considered an excess matters because it affects the NIA calculation and the total amount that must be removed from the IRA.
Example: During 2024, William (age 34) contributed $1,800 each quarter ($7,200 in total) to his Traditional IRA. He has exceeded the 2024 annual contribution limit ($7,000) by $200. A portion of the last quarter’s contribution is deemed to be the excess amount. As a result, the computation period must start the day before the last quarterly contribution was made and end on the date of withdrawal.
For recharacterizations involving multiple contributions, the IRA owner can choose (by date and by dollar amount, but not by specific assets) which contribution or portion thereof is to be recharacterized. If recharacterizing multiple contributions that were consecutive contributions in a series, only one NIA calculation is required, using a computation period based on the first contribution in the series.
Example 1: On January 15, 2024, John opened a Roth IRA and began contributing $500 each month throughout 2024. On February 22, 2025, John realized that he was not eligible to contribute to a Roth IRA for 2024 and decided to recharacterize the entire amount ($6,000) to a Traditional IRA. When calculating the NIA, the computation period should begin on January 14, 2024 (the day before the first contribution was made), and end on February 22, 2025 (the day that the contributions were recharacterized). Because there was no previous balance in this IRA, the beginning balance is $0, and the ending balance is $6,000, plus any earnings.
Example 2: Assume the same facts apply, except that John is eligible to contribute $5,000 to his Roth IRA for 2024. John decides to recharacterize $1,000 to his Traditional IRA. Because John’s IRA investments suffered a loss in both March and July 2024, John decides to recharacterize the contributions that he made on March 15 and July 15, 2024. He must calculate the NIA separately for each contribution and will have two computation periods (March 14, 2024 – February 22, 2025, and July 14 , 2024 – February 22, 2025).
