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August 25, 2022

Made Excess IRA Contributions? Here’s How You Can Correct and Avoid the Excise Tax
Alli Thomas

If you have an IRA, you’re probably aware that the IRS limits how much you can contribute each year. But you may not be aware of the consequence of exceeding that limit, which is set at $6,000 for those under age 50 and $7,000 for those 50 or older for 2022. 

Unsurprisingly, the consequence for excess IRA contributions is a tax penalty. In this case, it’s a 6% excise tax on any excess contributions and any earnings from those contributions. More significantly, this tax has to be paid each year until you withdraw the excess contributions (and for Roth IRA contributions, the earnings on those contributions) from your account. 

It’s possible to avoid paying that 6% tax even if you’ve already filed your taxes, but you have to take action by October 15 – the tax extension deadline. 

Let’s dig in. 

How Can an Excess IRA Contribution Occur?

There are a few common causes of excess IRA contributions. These include 

  • Your modified adjusted gross income was too high and reduced the amount you can contribute to a Roth IRA. 
  • You have multiple IRAs with different custodians. It’s easy to forget that the annual IRA contribution limit applies to ALL IRAs you own, not on an account-by-account basis. 
  • You use an automatic investment plan and your recurring contribution amount is too high. 
  • You forgot that you already made an IRA contribution. This can happen if you used a tax refund earlier in the year and then added more later. 
  • You rolled your Required Minimum Distribution over into an IRA. 

What to Do to Correct an Excess IRA Contribution

No matter how you wound up making excess IRA contributions, you’re not the first person to have done it. So let’s talk about how to correct it. If you found out about it: 

  • Before April 15 and you haven’t filed your return: Complete IRS Form 5239 and include it when you file your taxes. If you earned money on the excess contribution, you’ll need to remove it and include it in your gross income. Done properly, you will not have to pay the 6% excise tax. 
  • Before April 15 but you’ve already filed your taxes: You’ll need to file an amended tax return by October 15. Write a note at the top of IRS Form 1040x that says “Filed per section 301.9100-2.” If you earned money on the excess contribution, you’ll need to remove it and include it in your gross income. Again, if you follow this process, you will not have to pay the 6% penalty. 
  • After October 15: you’ll have to pay the 6% excise tax each year that the excess contribution is in your IRA as of December 31, until you remove it. 

Other Ways to Handle Excess IRA Contributions

If you have an excess IRA contribution from the previous tax year, you can carry it forward to the current tax year by reducing your current IRA contribution by the amount of the overage. While you’ll still have to pay the 6% penalty for the previous tax year, you won’t have to pay it again. 

If you’ve made an excess Roth IRA contribution, you can recharacterize it by moving the excess contribution and any earnings on that contribution to a traditional IRA. If you choose to take this route, you must complete the recharacterization by October 15. 

The Fine Print

  • When calculating earnings on excess IRA contributions, you must account for the performance of your entire IRA—not just the performance of the excess amount. This is often misunderstood or overlooked. 
  • As mentioned above, if you remove excess contributions and earnings by the filing extension deadline (October 15), they will be treated as ordinary income. If you’re under age 59 ½, you’ll have to also pay the 10% early withdrawal excise penalty on them. 
  • If you made a traditional IRA contribution and a Roth IRA contribution in the same tax year and had excess contributions, you must remove the excess Roth IRA contribution first. 

Questions about handling excess IRA contributions (and preventing them from happening again)? One of our financial advisors can help! 

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