Accidentally Contributed to a Roth IRA? How to Fix Excess Contributions

Contributing to a Roth IRA is a widely used retirement savings strategy due to its tax-free growth and withdrawals. However, exceeding contribution limits can lead to financial penalties. Understanding how to identify and correct excess contributions promptly is essential to avoid unnecessary costs.

Identifying an Excess Contribution

To determine if you’ve exceeded Roth IRA contribution limits, consult the IRS guidelines, which are updated annually. For 2024, the contribution limit is $6,500 for those under 50 and $7,500 for individuals 50 and older, including the catch-up provision. These limits also depend on your modified adjusted gross income (MAGI) and filing status. For instance, single filers with a MAGI over $153,000 are ineligible, while those earning between $138,000 and $153,000 can contribute a reduced amount.

Review your total contributions, including payroll deductions and manual deposits, against these thresholds. Miscalculating your MAGI or overlooking employer contributions can result in excess contributions. Additionally, changes in income or marital status during the year may affect your eligibility, requiring a reassessment of contributions.

Correcting Contributions Within Required Timelines

To avoid penalties, correct any excess contributions by the IRS deadline, typically April 15th (or later if an extension is filed). Withdraw the excess contribution and any associated earnings by this deadline to avoid a 6% excise tax on uncorrected amounts.

When withdrawing, calculate the net income attributable (NIA) to the excess contribution. The IRS provides a formula to determine earnings or losses generated by the excess amount, based on the account balance and timing of the contribution. Accurate calculations are crucial to ensure compliance and prevent further issues.

Penalties for Overdue Correction

Failing to correct an excess contribution by the deadline results in a 6% excise tax on the excess amount for each year it remains unresolved. The penalty compounds annually, increasing the financial burden over time.

For example, an uncorrected $1,000 excess contribution would incur a $60 penalty in the first year, with an additional $60 for each subsequent year. Over time, these penalties can become significant, negating the benefits of a Roth IRA’s tax-free growth. Timely correction is critical to avoid escalating costs.

Reporting on Your Tax Return

When reporting excess contributions, complete IRS Form 5329 to document the overage and any associated excise tax. This form ensures compliance and clarifies your financial obligations.

Identify the excess amount and calculate any excise tax owed. If corrective actions—such as withdrawing the excess contribution and earnings—were taken before the tax filing deadline, document these adjustments on Form 5329. Accurate reporting is key to resolving the issue and avoiding further penalties.