If you contribute too much money into your IRA during the year, how do you correct the problem without facing a tax penalty? Here are some tips.
Remember the annual limits
2023 Annual IRA contribution limits
What causes excess contributions
Excess contributions can be caused by:
Corrective action and penalty
If you place too much money into your retirement account you have until the tax filing deadline including any extensions to remove the excess contribution. Any excess amount will be subject to a 6% penalty for each year the excess contribution remains in your account. You may also owe tax on contributions and earnings created by the excess contribution.
Traditional IRAs. You will need to account for the additional income on your tax return. So if you discover the problem after you file your income tax return, you may need to file an amended tax return.
Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account is taxable.
What can you do to minimize the risk of excess contributions?
Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Conduct the math to ensure you will never contribute too much.
Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Want to wait for your refund? Remember you have until April 15th of the following year to fund your IRA. Consider taking advantage of this additional time.
Rollovers are not contributions. Remember rollovers ARE NOT contributions so the annual contribution limits do not apply. If you wish to roll funds from a qualified plan into your IRA, the excess contribution limits will not impact you as long as the rollover is handled correctly. It is a good idea to seek expert help in this area to ensure your rollover is compliant with tax code. For instance, there are usually tax obligations if the rollover is from a traditional IRA into a Roth IRA.
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Mia Verc, CPA; Janice Papais, CPA
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