Making contributions to your IRA is one of the most definite ways to ensure your account is growing each year, but with almost all self-directed accounts having different contribution limits, it can be hard to keep up with how much you are putting into your accounts.
What happens if you accidentally put too much money into your IRA or contribute more than your earned income? As great as it would be to dump as much money as you’d like into your retirement accounts, there are rules surrounding these limits that can penalize you if not followed or corrected.
What Is an Excess Contribution?
Generally, an excess contribution is a contribution that exceeds the stated IRA contribution limit, though there are many other ways an excess contribution can occur in an IRA. Reasons they can occur include:
- Making a contribution that exceeds to annual contribution limit
- Making a contribution to a traditional IRA after age 72
- Making a contribution to a Roth IRA when your MAGI exceeds the income limit
- Making a contribution that is more than your earned income
- Making a contribution on behalf of an individual after date of death
- Making ineligible or improper rollover contributions
- Rolling over required minimum distributions
Understanding when excess contributions occur is important, because contributions that are not corrected are taxed at 6% per year for each year the excess amount stays in the account. That means if you don’t fix the contribution, you’ll owe the penalty each year when you file your yearly income tax return.
Correcting Excess Contributions to IRAs
The good news is there are solutions if you find you’ve made a mistake! If you discover that you’ve contributed too much, you can remove the contribution and any income it has earned before filing your tax return (including extensions) to avoid the 6% penalty. Or, if you find that you’ve contributed too much after the October 15 extended deadline, you can typically carry the excess contributions forward as an IRA or Roth IRA contribution for that subsequent year. Just be sure to reduce your contribution by the amount you carried forward, or you might exceed the limit again for the next year!
If you think you’ve made a contribution that exceeds your annual limit and need help correcting it, or you’d simply like to get more information about excess contributions, we can help! Schedule your free consultation with an IRA Specialist today by clicking HERE.