What happens if I Make an Excess IRA Contribution?

January 26th, 2011

Generally, an excess IRA contribution is the amount contributed to an individual’s Traditional IRA and Roth IRA for the year that is more than the above limits.

Regular (not rollover) contributions made in the year a person is age 70½ and any later year are also excess contributions unless made to a Roth IRA.

An excess contribution could be the result of an individual’s contribution, his or her employer’s contribution or an improper rollover contribution.

Tax on Excess Contributions. In general, if excess IRA contributions are not withdrawn by an individual’s income tax return due date (including extensions), then the individual is subject to a 6% tax. The individual must pay the 6% tax each year on excess amounts that remain in his or her traditional or Roth IRA at the end of his or her tax year. The tax cannot be more than 6% of the combined value of all the IRAs as of the end of the tax year.

Excess Contributions Withdrawn by Due Date of Return. An individual will not have to pay the 6% tax if he or she withdraws an excess contribution made during the year with any income earned on that excess contribution by his or her income tax return due date, including extensions.

Excess Contributions Withdrawn After Due Date of Return. An individual must pay the 6% tax if he or she withdraws an excess IRA contribution after his or her income tax return due date. In general, individuals must include all distributions (withdrawals) from their traditional IRA in their gross income.