Early in 2016 I contributed the maximum $5500 into our Roth IRA's and our income ended up exceeding the MAGI limit to where we can only contribute roughly ~$3200 (good problem to have!). My plan is to remove the excess contribution prior to filing my taxes and calculate the net income based on return between the excess contribution and now.
I'm pretty comfortable with the net income calculation itself, but how does this not become a circular reference within my taxes? For example:
1. I calculate net income due to excess to be $500.
2. My IRA provider distributes the excess plus my calculated net income, the income portion of which counts as earnings in 2016
3. These earnings increase my MAGI, which reduces the amount I can contribute to a Roth, with increases the excess, and then increases net income again
4. Repeat steps 2 and 3?
What am I missing? Do the earnings not hit 2016 income but actually 2017?
Lesson learned: Don't contribute to a Roth until your taxes are complete!