Paid too much into your traditional or Roth individual retirement account? Don't panic — it’s not too late to walk back an excess contribution to your IRA. But it’s less trouble if you do it before the April tax-filing deadline.
The annual limit on contributions to an IRA is $7,000 in 2024 ($8,000 if age 50 or older). It’s important to act if you contribute too much, because you must pay a 6% penalty tax on the excess amount every year it goes uncorrected.
Here’s what you should do, and what you need to know to prevent future excess contributions.
If you've contributed too much to an IRA, fix it before filing taxes
The before-filing timeline is ideal, because it creates significantly less work — and exposes you to fewer potential penalties. If you over contributed for the year and you haven't yet reached the tax-filing deadline:
Contact your plan administrator. You'll need to tell them you made an excess contribution, and ask them for instructions on how to fix it, including the necessary paperwork or online process.
Withdraw the excess contribution and earnings from the IRA. You can generally avoid the 6% penalty by withdrawing the excess amount and attributable earnings or losses by the tax-filing deadline in April.
Pay taxes on any earnings. Any earnings you remove from the IRA are taxed as ordinary income. (Earnings are figured through a formula called "net income attributable," which can be earnings or losses, depending on how the account has performed.) You may have to pay a 10% tax for early withdrawal on any earnings if you are younger than 59½. Consult your plan administrator or tax professional about whether that applies to you.
Discovered excess IRA contributions after filing taxes? Do this
You have a few options if you discover an excess contribution after you file your taxes:
Contact your plan administrator and file an amended tax return. If you remove the excess contribution and earnings and file an amended return by the October extension deadline, you could avoid the 6% penalty.
Carry the excess forward to the new tax year. You’ll pay a 6% penalty while the excess contribution is on the books, but may avoid future penalties.
Roth IRA option: Move the excess to a traditional IRA. If you have a Roth IRA, another way to avoid penalties is to transfer the excess amount and any earnings into a traditional IRA. The IRS calls this move a “recharacterization.” Rules state this should be done before tax day, but allows an extension if you filed your taxes on time and take "corrective action" toward the recharacterization within six months of the filing deadline.
To help you avoid this problem in the future, know the main culprits for excess IRA contributions:
You’ve exceeded the IRA limit through one or more accounts. The annual limit on IRA contributions is the combined total of traditional and Roth IRAs, not just any one IRA. Pay attention to how much you contribute to each account that counts toward that maximum.
You’ve set your automatic investment plan too high. Automatic contributions are a great way to stay on plan; just make sure they don't add up to more than the overall limit.
You make too much income for a full Roth IRA allowance. Unlike traditional IRAs, Roth IRAs set income limits as to who qualifies, and contributions are reduced or phased out at higher income levels. Consult our Roth IRA calculator to determine how much you can contribute.
Overcontributions to your IRA are a nuisance, but more of a speed bump than a roadblock on your way toward saving for retirement.
Withdraw the excess contribution and earnings from the IRA. You can generally avoid the 6% penalty by withdrawing the excess amount and attributable earnings or losses by the tax-filing deadline in April. Pay taxes on any earnings. Any earnings you remove from the IRA are taxed as ordinary income.
If you contribute too much to your IRA, you have 3 options: Complete a return of excess contributions form, recharacterize your contributions, or apply your contributions to the next year.
It is important to note that there is no formal IRS method to correct SIMPLE IRA excesses. You should consult your tax advisor for guidance prior to completing this form.
Obviously any individual institution with half a clue isn't going to let you go over the limit themselves, but they aren't going to know if you made contributions through another brokerage. However, the IRS will know when both brokerages each file a form 5498 and the numbers add up to over the limit.
The IRA contribution limit is $7,000, or $8,000 for individuals 50 or older in 2024. Anyone with earned income can contribute to a traditional IRA, but your income may limit your ability to deduct those contributions. Arielle O'Shea leads the investing and taxes team at NerdWallet.
IRS Form 1099-R will also be issued for the year in which the excess contribution was removed from your IRA. Form 1099R will be issued for the calendar year of the distribution, even if the distribution was made to correct an excess contribution made the prior year.
Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.
If your income was too high or too low to contribute, the amount you withdraw, if less than the annual contribution limit, is not taxable. If you exceeded the annual contribution limit, the amount you withdraw could be taxable in the year of the withdrawal.
IRA contributions will be reported on Form 5498: IRA contribution information is reported for each person for whom any IRA was maintained, including SEP or SIMPLE IRAs. An IRA includes all investments under one IRA plan.
Yes, it is worth maxing out your Roth IRA as long as reaching contribution limits won't put you under financial stress now. The pros outweigh the cons in this scenario. However, if your employer offers contribution matching, prioritize contributing to your 401(k) first, but only up to their matching limit.
No, there is no maximum traditional IRA income limit. Anyone can contribute to a traditional IRA. While a Roth IRA has a strict income limit and those with earnings above it cannot contribute at all, no such rule applies to a traditional IRA. This doesn't mean your income doesn't matter at all, though.
Your ability to deduct an IRA contribution depends on how much you earn, whether you or your spouse already contribute to another plan(s), and the type of IRA you have. Limits are adjusted every year for inflation.
Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.
You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
Corrective Distribution of Excess Contributions. Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess can be corrected. The excess is distributed to you by the plan (along with any income earned on the excess).
Go to Fidelity.com or call 800-544-5373. Use this form to request a return of an excess employer contribution made to your SEP IRA. If you are a nonresident alien, please contact Fidelity prior to completing this form, as you may be subject to additional requirements.
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