What to Do If You Contribute Too Much to Your IRA

What Are the IRA Contribution Limits?

Both traditional IRAs and Roth IRAs have the same annual contribution limits. Limits are determined for each individual taxpayer, so married taxpayers may each contribute to their own IRAs. You can divide your contribution between a Roth and a traditional IRA, but your total contributions must not exceed the following amounts for 2022:

Roth IRAs also have income limits. Limits vary for single filers, married couples filing jointly and married people filing separately. Compare your modified adjusted gross income against the limits in the chart below:

Source: IRS

If your income is at or near the above limits, it may be worth calculating your modified adjusted gross income and figuring out what your partial Roth contribution would be. Ask a tax pro for help or use Worksheet 2-2 in IRS Publication 590-A, Contributions to Individual Retirement Accounts (IRAs) to help you do the math.

What Is the Penalty for Excess IRA Contributions?

The penalty for excess IRA contributions is 6% per year for every year this money remains in your account. Also, be aware of these IRS rules that may affect your tax bill:

• You cannot deduct excess contributions to a traditional IRA on your tax return.
• Earnings and interest on your excess contributions are not tax-free. You must report them as gross income in the year your excess contribution was made—and every year they remain in your account.
• Removing excess money from your IRA may count as an early distribution. If you are past the final deadline for tax filing, including extensions, you may have to pay income tax and a 10% early withdrawal penalty when you take your excess contribution and earnings out of a traditional IRA if you are under age 59½.

What Happens When You Contribute Too Much to an IRA?

Suppose you made a $500 excess contribution to your traditional IRA last year. If you discover the mistake while preparing your taxes, you may still have time to fix the problem without penalty.

First, you should contact your IRA provider and explain the situation. They may be able to apply your extra payment to this year's IRA contribution instead, which will reduce the prior year's contribution amount to $6,000. They should also be able to help you calculate any interest or earnings you made on the extra $500 and apply that amount to your current year's contribution as well, saving you the trouble of withdrawing the money.

You still have to report the earnings on your excess contribution on your tax return, but the impact should be minor: A 5% dividend on $500, for example, is only $25 in additional income. Meanwhile, you won't have to pay an early withdrawal penalty to change the contribution year on your excess funds, as you might if you had simply withdrawn the money. And you won't be subject to the 6% excise tax since you caught the error before filing your taxes.

How to Fix Excess IRA Contributions

Acting quickly is the key to fixing excess IRA contributions with minimal financial consequences. Here are the basic steps to follow:

1. Figure Out Your Overpayment Amount

Determine how much you've overcontributed and any earnings you've made.

• For both traditional and Roth IRAs, any contribution above the limits shown in the table above are considered excess. The $6,000 limit ($7,000 for 50+) applies for 2019 through 2022.
• For Roth IRAs, calculating your contribution limit when your income is in the phase-out range takes a bit of math. If income is approaching $129,000 as a single taxpayer or $204,000 as joint filers, see Publication 590-A, Contributions to Individual Retirement Accounts (IRAs) for help or consult your tax advisor.
• Interest and earnings are usually tallied by your IRA provider. To do the IRS calculation yourself—or create a quick estimate—see Worksheet 1-4 in IRS Publication 590-A.

2. Choose Your Best Step Based on Timing

Your options are different depending on where you are in tax year:

• Remove excess contributions before April 15. You can choose to either remove your excess contribution (plus earnings) or assign it to a future year. Don't include your excess contribution(s) on your tax return. Report any interest or earnings from the excess money as part of your gross income. Timing is critical here. Traditional IRA distributions taken after the tax filing deadline are subject to penalty.
• File an amended return before October 15. Suppose you filed your taxes on April 15 but realized you made an excess contribution after the fact. You have six months to file an amended return with an amended Form 5329, showing that you have withdrawn the money (or assigned it to a future year) and reporting any earnings you've made.
• Pay taxes on contributions and earnings after October 15. Once the final tax filing date including extensions has passed, you'll owe a 6% tax on your excess contributions and earnings for every year the money was in your account at the end of the year. So, for example, if you made an excess contribution of $1,000 in 2019 and are aiming to fix it in 2022, you will owe $60 plus 6% of earnings for 2019, 2020 and 2021. Your penalty tax can't be more than 6% of the combined value of all your IRAs.

Again, when you remove money from a traditional IRA, you may owe income tax and a 10% early withdrawal tax. The same is not true of a Roth. You can withdraw Roth contributions at any time without penalty, though you may incur a penalty for withdrawing earnings if you don't meet distribution requirements. For either type of account, you must also report any earnings on excess contributions as income for every year you have had earnings.

3. Adjust Your Contributions Going Forward

Make sure you aren't on track to over-contribute again this year, especially if you applied excess contributions to the current year. Although you can always un-do an excess contribution, it's much easier to get the math right in the first place.