If you contributed too much to your traditional or Roth individual retirement account, you must pay a 6% penalty tax on the excess amount for each year it goes uncorrected. It’s possible to walk back an excess contribution. But it’s less trouble if you do it before the April tax filing deadline.
Here’s what you should do and what you need to know to prevent future excess contributions.
If you've overcontributed 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 overcontributed for the year and you haven't yet reached the tax filing deadline:
1. 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.
2. 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.
3. Pay taxes on any earnings
Any earnings you remove from the IRA are taxed as ordinary income. Earnings are calculated using 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 59 ½. Consult your plan administrator or tax professional about whether that applies to you.
Did you discover excess IRA contributions after filing taxes? Do this
You have a few options if you discover an excess contribution after you file your taxes:
Option 1: 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.
Option 2: 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.
Option 3: If you have a Roth IRA, 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 allow for an extension if you filed your taxes on time and take "corrective action" toward the recharacterization within six months of the filing deadline.
Common reasons people overcontribute to an IRA
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 for 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.
Make sense of the markets with The Nerdy Investor
A weekly wrap on what's moving markets, plus two monthly deep-dives on how to improve your investing, straight to your inbox.
Explore more on
