How Do I Withdraw Excess IRA Contributions?
If you’ve contributed too much to your IRA for a given year, you’ll need to contact your bank or investment company to request the withdrawal of the excess IRA contributions. Depending on when you discover the excess, you may be able to remove the excess IRA contributions and avoid penalty taxes.
What Is an Excess IRA Contribution?
To understand your options for removing an excess contribution, let’s review the contribution rules. Each year, retirement savers must follow a contribution limit when they put money in their IRA. The annual limit for both types of IRAs – Traditional and Roth IRAs – is a combined $5,500 ($6,500 for those age 50 or above).
It doesn’t matter if you have multiple IRA accounts in different investments or at separate firms, the limit applies across the board. For example, if you have one account at your bank and two separate funds with a mutual fund company, you could only deposit $5,500 in total for one tax year across the accounts.
Let’s say you are age 45 and you contribute $8,500 across your IRA accounts. That means you have an excess IRA contribution of $3,000.
If you remove the contribution:
- Before your taxes are due and before filing your return: You can avoid the 6% excise (penalty) tax. You will need to include Form 5329 with your filing to reflect that the withdrawn contributions are no longer treated as having been contributed. If the excess generated any earnings, you’ll need to remove them and include them in your gross income.
- Before your taxes are due but after filing your return: You can avoid the 6% excise tax. You will need to file an amended return within six months of the original return due date (generally by October 15). Write “Filed pursuant to section 301.9100-2” at the top of Form 1040X. If the excess generated any earnings, you’ll need to remove them and include them on your gross income.
- After the extended due date of your return, you will be subject to the 6% excise tax each year the excess remains in the account at the end of the year (by December 31) until it is removed. You do not need to remove any earnings made on the excess.
You can also address the excess by using it toward the next year’s contribution. By doing so, you will avoid the penalty once the excess is treated as an allowable contribution. This treatment is automatic, meaning you do not need to make any special elections to carry forward the excess.
How to Withdraw Excess Roth IRA Contributions
As mentioned above, Roth IRAs use the same contribution limit as Traditional IRAs. If you’ve contributed over the threshold, you’ll need to follow one of the methods to remove the excess. Note that the $5,500 ($6,500) is a combined limit for both IRAs. For example, if you’re 45 and you’ve contributed $4,000 to a traditional IRA, only $1,500 is available to contribute to a Roth.
A different limitation may apply to Roth contributions. If your Modified Adjusted Gross Income is too high, you may be ineligible or only eligible to make a partial contribution to a Roth IRA. In the event that you are not eligible or partially eligible (meaning you are in or beyond the Roth phase-out range) and you have made ineligible Roth IRA contributions, you may recharacterize the disallowed contribution to a traditional IRA rather than withdraw it. In other words, you are reclassifying the contribution as if you made it to a traditional IRA to begin with.
In all likelihood, your traditional IRA contribution will be nondeductible. Keep in mind, nondeductible contributions give you basis in your IRA. This means future distributions will be partly nontaxable. Be sure to complete Form 8606 to report nondeductible contributions.
Similar to requesting a withdrawal of an excess IRA contribution, you should contact your bank or investment firm to request the recharacterization.
Questions About Your IRA and Taxes?
Our Tax Pros are here to help. They’re dedicated to knowing the ins and outs of taxes and can help you understand your options.
Make an Appointment to speak with a Tax Pro today.