How to Fill Out an IRA Excess Contribution Removal Form

Contributing too much to an IRA can lead to penalties if not corrected in time. The IRS imposes a 6% excise tax on excess contributions for each year they remain in the account, making it important to address the issue promptly. Fortunately, there are ways to fix the mistake and avoid unnecessary costs.

One common solution is removing the excess contribution along with any earnings it generated. This typically requires filling out a removal form provided by your IRA custodian. Completing this form correctly ensures compliance with IRS rules and prevents further complications.

Determining the Excess Amount

To determine how much was contributed beyond the allowable limit, review IRS guidelines for the specific tax year. In 2024, the maximum contribution for a traditional or Roth IRA is $7,000 for individuals under 50 and $8,000 for those 50 or older. Exceeding these limits can occur due to miscalculations, employer contributions to a SIMPLE or SEP IRA, or income restrictions affecting Roth IRA eligibility.

For Roth IRAs, income phase-out ranges determine whether contributions are reduced or eliminated. In 2024, single filers with a modified adjusted gross income (MAGI) above $146,000 begin to see reduced contribution limits, with full ineligibility at $161,000. Married couples filing jointly face reductions starting at $230,000, with a complete phase-out at $240,000. If contributions were made without considering these thresholds, a portion may be considered excess.

Traditional IRAs do not have income limits for contributions, but deductibility depends on participation in an employer-sponsored retirement plan. If covered by a workplace plan, deduction limits apply based on MAGI. In 2024, single filers earning over $87,000 and joint filers above $143,000 lose the ability to deduct contributions. While non-deductible contributions are allowed, exceeding the total contribution cap still results in an excess.

Withdrawal of Contributions and Earnings

To remove an excess IRA contribution, both the original amount and any earnings it generated must be withdrawn before the tax filing deadline, including extensions. The IRS treats these earnings as taxable income for the year of withdrawal, and they may also be subject to a 10% early distribution penalty if the account holder is under 59½. The financial institution holding the IRA typically calculates the earnings portion using an IRS-approved formula.

The Net Income Attributable (NIA) formula determines the amount to be withdrawn, considering the overall performance of the IRA during the period the excess contribution was in the account. If the account experienced gains, the withdrawn amount will be higher than the excess contribution itself, while losses could reduce the amount required to be removed. For example, if an excess contribution of $2,000 was made and the IRA grew by 5% during that time, the total amount to be withdrawn would include the $2,000 plus the proportional earnings. Conversely, if the account lost value, the removed amount would be lower than the original contribution.

Once the excess and earnings are withdrawn, the IRA custodian issues Form 1099-R, which reports the distribution to the IRS and the account holder. The taxable portion is included in income for the year of withdrawal, and if subject to the early withdrawal penalty, it must be reported on Form 5329. Proper documentation ensures compliance with IRS rules.

Recharacterizing Instead of Withdrawing

Transferring an excess contribution from one type of IRA to another, known as recharacterization, can correct mistakes without incurring penalties. This option is useful when the excess contribution resulted from misjudging eligibility rather than exceeding the annual limit. The IRS allows recharacterization to be completed by the tax filing deadline, including extensions, typically giving individuals until October 15 if they file for an extension.

The process involves moving the contribution, along with any associated earnings or losses, from the original IRA to the correct type. For example, if a taxpayer mistakenly contributed to a Roth IRA but later realizes their income exceeded the eligibility threshold, they can recharacterize it as a traditional IRA contribution. This avoids excess contribution penalties while preserving the tax-advantaged status of the funds. However, once a contribution is recharacterized, it is treated as if it had been made to the new IRA from the outset, meaning it must adhere to the rules governing that account type.

IRA custodians typically require a formal request to process a recharacterization, often using a specific form or written instructions. Some institutions may impose administrative fees or processing delays, so initiating the request well before the deadline is advisable. The recharacterization must also be reported on tax returns, with Form 8606 used to document non-deductible contributions when applicable.

Filling Out the Required Removal Form

Correcting an excess IRA contribution begins with obtaining the appropriate removal request form from the financial institution managing the account. Each custodian has its own version, but they generally require details such as the account holder’s name, IRA type, tax year of the excess contribution, and the exact dollar amount to be removed. Some forms also ask whether the request is being made before the tax filing deadline to determine if associated earnings must be included in the withdrawal.

Providing accurate information ensures the custodian processes the request correctly. Many forms include a section for specifying the reason for removal, with options such as “excess contribution” or “removal before the tax filing deadline.” Selecting the correct category helps the institution report the transaction properly on Form 1099-R. Additionally, if the excess contribution was made over multiple deposits, some custodians require a breakdown of the amounts and dates.

Reporting the Correction on Your Return

Once an excess IRA contribution has been removed or recharacterized, it must be properly reported on the tax return. The IRS requires taxpayers to disclose the withdrawal or adjustment, ensuring that any taxable earnings or penalties are accounted for in the correct year.

For those who removed the excess contribution along with any earnings, Form 1099-R issued by the IRA custodian will detail the distribution. The taxable portion, including any earnings, must be included as income on Form 1040, and if subject to the early withdrawal penalty, it must also be reported on Form 5329. If the excess was not corrected before the tax filing deadline, the 6% excise tax applies and must be calculated on Form 5329, with the penalty amount carried over to Schedule 2 of Form 1040.

Recharacterizations are reported differently, as they are treated as if the contribution was originally made to the new IRA type. Taxpayers must include an explanatory statement with their return detailing the amount recharacterized, the date of the transfer, and the receiving account type. If the recharacterization involved a Roth IRA, Form 8606 may also be required to track basis in the account.

Coordinating With the IRA Custodian

Working closely with the IRA custodian ensures the removal or recharacterization is processed correctly and reported accurately to the IRS. Each financial institution has its own procedures, and failing to follow them can result in delays or errors that complicate tax reporting. Initiating the request well before the tax deadline allows time for processing and ensures that any required forms are issued in time for filing.

Custodians typically provide guidance on how to complete the necessary paperwork and may assist in calculating the earnings portion of an excess contribution removal. Some institutions allow online requests, while others require physical forms to be submitted. Verifying that Form 1099-R or other relevant tax documents reflect the correction accurately is important, as errors on these forms can lead to IRS inquiries. If discrepancies arise, contacting the custodian promptly can help resolve issues before they impact the tax return.