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.
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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.
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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.
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Common reasons for excess IRA contributions
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.
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.
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.
The deadline for a timely correction of an excess contribution is the tax-filing deadline (plus extensions) in the year you made the excess contribution. To be eligible to remove your excess contribution after the tax-filing deadline, you must file your taxes on time or file for an extension to file your return.
You can withdraw the money, recharacterize the excess contribution into a traditional IRA, or apply your excess contribution to next year's Roth. You'll face a 6% tax penalty every year until you remedy the situation.
High earners can circumvent contribution limits to Roth IRAs by using the backdoor strategy. You save the most if you do not have pre-existing traditional IRA balances that must be factored into your tax bill or if your employer's qualified plan allows rollovers of deductible IRA balances.
Your IRA custodians send a form to the IRS each year tell them how much you've contributed in that tax year. So if you've over-contributed, that's how they would know.
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.
In a 401(k) plan, corrective distributions happen when the company must return a portion of the contributions made by "highly-compensated employees" (HCEs).
Traditional IRA Income Limits and Contribution Limits 2024. 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.
Excess contributions are subject to a 6% excise tax for each year they remain in your account. It's possible to avoid that penalty by withdrawing the excess contributions or recharacterizing them as traditional IRA contributions by the due date of your tax return, including extensions.
Yes.Backdoor Roth IRAs are still allowed in 2024. However, there has been talk of eliminating the backdoor Roth in recent years. And the future is, of course, difficult to predict.
The first thing you should do if your 401(k) or individual retirement plan (IRA) is losing money is to check that you are well diversified. You want your money distributed among many stocks, bonds, and other investment products.
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.
You have the option of taking up to 85 percent of your excess concessional contributions out of your superannuation account in order to help pay the tax, or you can choose to let the excess contribution remain in your account and pay the income tax bill with money that is not part of your superannuation.
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