If a taxpayer makes a contribution to their traditional IRA or ROTH IRA and later realizes they were not eligible, they have made an excess contribution subject to an excise tax. The excise tax is 6% of excess contribution and applies each year these funds remain in the account.
Correcting Excess IRA Contributions
How do you correct this situation?
- You need to withdraw the excess contribution plus any earnings (or loss) by the due date of your return including extensions. This avoids the 6% excise tax all together but any earnings are taxable.
- If the funds are still in your account after the due date (including extensions) of your return, you need to withdraw the excess contributions as soon as you can. In this situation, you only need to withdraw the contributions, not the earnings. Each year the funds remain in the account, you will need to file Form 5329 and calculate the 6% excise tax. For example, if you incorrectly contributed $5,000 to a Roth for the last two years, you will owe $300 for the first year ($5,000*6%) and $600 for the second year ($5,000 from year 1 + $5,000 from year 2 * 6%). As long as you withdraw the $10,000 before the end of year 3, you will owe no more excise tax. The earnings on the $10,000, however, can remain in the Roth account.
If you find yourself in this situation, please do not wait. Contact your Anders advisor to avoid unnecessary taxes.
Our firm provides this information for general educational guidance only and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Podcasts posted by Anders CPAs + Advisors are not intended to be used and cannot be used by any individual or business, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Please note that some content may be generated using artificial intelligence and is intended for educational and informational purposes only. In no way does listening, reading, emailing or interacting on social media with our content establish a professional relationship.
All Insights
