Excess IRA Contribution – Is this Bad?
Typically, an excess IRA contribution is the amount that you contribute to your Traditional IRA and Roth IRA for the year. As the term implies, the contribution you make is more than the allowable limits. If you happen to contribute more than you’re meant to contribute, there is a possibility of incurring a tax penalty by the IRS. So if you ask, “Is an excess IRA contribution bad?” the answer is an affirmative, Yes. An excess contribution may be the result of your contribution, your employer’s contribution or an improper rollover contribution. Even if you’re 70 1/2 or older, you can make an excessive contribution unless you make it to your Roth IRA.
Excess Contribution Tax
Generally, the penalty tax on excess contributions is 6%. This is if you don’t withdraw the contribution by the income tax return due date. The due date for filing your income taxes is April 15. As you know, this was not the case for 2018, as April 15 fell on a Sunday and Monday was a holiday in some areas. Therefore, the income tax due date was April 14. Excluding these minor exceptions, the due date is April 15. You have to pay the 6% tax each year on excess contributions that remain in your traditional or Roth IRA at the end of the tax year. The tax penalty is never greater than 6% of the combined value of all the IRAs at the end of the tax year.
Correcting the Excess IRA Contribution
Excess Contributions Withdrawn by Due Date of Return. If you make an excess contribution, there are ways to correct it and avoid a 6% penalty by the IRS. You don’t have to pay a penalty if you withdraw the excess contribution after the tax return is due. Now, what happens when if you don’t withdraw before or by the due date?
Excess Contributions Withdrawn After Due Date of Return. You will pay the penalty after the tax return is due. Additionally, you’ll have to pay 6% excise tax on the contribution and income you earned from that contribution.