If you contribute more than the annual allowable limit to a Roth IRA given your income and tax filing status, you need to withdraw the excess amount or face a 6% penalty.
The good news is that it’s possible to withdraw or transfer excess IRA contributions. Knowing how to fix this mistake — and how to best plan yearly contributions — can help you to avoid an excess IRA contribution penalty going forward.
Note that the rules are generally the same for excess contributions to a traditional IRA or to a Roth IRA.
Key Points
• Excess contributions to a Roth IRA incur a 6% penalty each year they remain in your account.
• You can withdraw excess contributions before the tax filing deadline (or extension deadline) to avoid penalties.
• Report excess IRA contributions on IRS Form 5329, which you include with your Form 1040 when you file your return or an extension.
• If you don’t wish to withdraw excess contributions, you may be able to recharacterize — or shift them — to another type of IRA before the deadline.
• You may also be able to apply excess contributions to future years within the allowed limits to avoid penalties.
Maximum Annual Roth IRA Contributions
If you don’t know what a Roth IRA is, it’s a tax-advantaged individual retirement account. Contributions to a Roth are made with after-tax dollars, and qualified withdrawals from a Roth IRA are tax-free, which can make them attractive for people who expect to be in a higher tax bracket when they retire — or who want a tax-free income source later in life.
You can contribute to both a Roth IRA and a workplace retirement plan like a 401(k), at the same time, as long as you observe the contribution limits for each type of account, and as long as you qualify for a Roth IRA.
Whether you’re eligible to contribute to a Roth IRA depends on your tax filing status and income (see chart below). Roth IRA contribution limits are set by the IRS and adjusted periodically for inflation.
For 2024, the maximum Roth IRA contribution is $7,000. The limit increases to $8,000 for individuals aged 50 and older. These annual limits are the same, whether you’re saving in a traditional IRA vs. Roth IRA, and these are total amounts across all IRA accounts.
Here’s how Roth IRA income limits and contribution rules work for 2024.
|
Filing Status |
If your Modified Adjusted Gross Income (MAGI) is … |
You can contribute… |
|
Married filing jointly or qualifying widow(er) |
< $228,000 |
Up to a maximum of $7,000 per year ($8,000 for those 50 and older) |
|
Married filing jointly or qualifying widow(er) |
≥ $228,000 and < $240,000 |
a reduced amount |
|
Married filing jointly or qualifying widow(er) |
≥ $240,000 |
Not eligible to contribute to a Roth |
|
Married filing separately and you lived with your spouse at any time during the year |
< $10,000 |
a reduced amount |
|
Married filing separately and you lived with your spouse at any time during the year |
≥ $10,000 |
Not eligible |
|
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year |
< $146,000 |
up to the limit |
|
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year |
≥ $146,000 and < $161,000 |
a reduced amount |
|
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year |
≥ $161,000 |
Not eligible |
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What Happens If You Contribute Too Much to a Roth IRA?
Opening an IRA can get help you save for retirement. The downside is that contributing too much money to a Roth IRA (or traditional IRA) can result in a tax penalty. An excess contribution to an IRA can happen when:
• You contribute more than the annual contribution limit because you have multiple IRAs.
• You make an improper rollover contribution.
• You inadvertently contribute more than the amount allowed for your income and filing status.
• You made a contribution early in the year, but you ended up earning more than anticipated, which changed the amount you would be allowed to contribute.
Excess IRA contributions are subject to a 6% penalty each year that they remain in your account. Per the IRS: “The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”
If you’ve contributed too much to your Roth IRA, there are some steps you can take to rectify this mistake.
How Do You Report Excess Roth IRA Contributions?
Excess IRA contributions are reported on IRS Form 5329. You’ll include this form with your Form 1040 when you file your return or an extension.
This form allows the IRS to calculate how much of a tax penalty you’ll owe if you don’t take steps to correct an excess Roth IRA contribution.
Can You Withdraw Excess Roth IRA Contributions?
If you realize that you contributed too much before you file your tax return, you can avoid the tax penalty by withdrawing the excess Roth IRA contribution by the tax filing deadline, or by the extension deadline. Any excess amounts withdrawn before the tax filing or extension deadline, would not be subject to the 6% penalty.
That said: If those excess contributions generated investment gains while in your IRA account, you’d have to withdraw the gains as well. And you would have to report them as income.
However, as of Dec. 29, 2022, a “corrective distribution” — meaning, a withdrawal of the gains on an excess contribution — is no longer subject to a 10% early withdrawal penalty.
You can contact your IRA custodian (the bank that holds your IRA account) if you’re not sure how to withdraw excess amounts. Keep in mind that you’ll need to withdraw the excess contribution amount as well as any earnings those contributions generated.
You may owe tax on the earnings from the excess contribution amount (see below for possible ways to avoid this). There are no guarantees that a Roth contribution would see a gain, however; if there is a net loss, you could still withdraw the remainder of your contribution, minus the loss.
If you’ve already filed your taxes, you have up to six months — usually until October 15 of the same year — to amend your return and make the necessary withdrawals.
Recharacterizing Excess Roth IRA Contributions
Recharacterizing IRA contributions allows you to move assets deposited in one IRA to a second IRA, and treat that money as if it had originally been contributed to the second IRA.
If you have excess contributions because you contributed more than was allowed based on your income and filing status, recharacterization could allow you to avoid a tax penalty. You would transfer the excess contribution from one IRA to the second IRA by the tax-filing or extension deadline, doing a direct transfer within the same institution, or a trustee-to-trustee transfer to an IRA at another bank (not a withdrawal, which could be subject to additional taxes and/or a penalty).
For example: If you made excess contributions to an IRA for tax year 2024, you have until April 15, 2025 to recharacterize the excess contribution and earnings (or net loss); or until the extension deadline in October.
If you made excess contributions in prior years, you couldn’t recharacterize these, as the window for recharacterization would have passed, and you’d likely owe a penalty.
In order to complete a recharacterization of the excess funds, you must take the following steps:
• Include any earnings specific to the excess amount. If there was a loss attributable to that contribution, you would note a negative amount.
• Be sure to report the recharacterization on your tax return for the year in which you made the original excess contribution.
• Use the date of the excess contribution to the first IRA as the date the contribution is made to the second IRA.
Applying Excess Contributions to the Following Year
The IRS also allows you to carry excess Roth IRA contributions forward. You can apply excess contributions to your annual contribution limit for future years.
Again, the contributions you carry forward must be within your allowed limit for that following year. Be sure to check, so as not to create excess contributions in a subsequent year.
Penalties for Excess Roth IRA Contributions
As mentioned, the IRS imposes a penalty on excess Roth IRA contributions in the form of a 6% tax, as of 2024. It applies each year that excess Roth IRA contributions remain in your account.
Keep in mind that you might also owe ordinary income tax on any earnings on that contribution amount as well.
When Are Excess Contributions Penalized?
Excess Roth IRA contributions are penalized when they’re not corrected. The IRS will continue to penalize you for each year that you allow the excess contributions to remain in your IRA. That rule goes for both Roth and traditional IRA contributions.
Again, if you haven’t filed your tax return yet, the simplest way to correct them and avoid the penalty is to withdraw the excess amounts, plus any gains. As long as you do that by the tax-filing deadline or extension deadline, then the IRS doesn’t consider those amounts to be excess contributions.
How to Avoid Excess IRA Contributions
Avoiding excess IRA contributions is possible if you understand how much you’re able to contribute each year, then planning your contributions accordingly. With Roth IRA contributions, your contribution amount will depend on your tax filing status and modified AGI for the tax year.
You can use a tax calculator to estimate your modified AGI and use that to plan your contributions. Remember that you have until the April tax-filing deadline to make IRA contributions for the current tax year.
The extra few months allow you time to prepare your return and make your contributions — or withdraw them if necessary — to stay within your annual contribution limit.
Calculating Excess Contributions
While you have until tax day in April of the following year to contribute to a Roth IRA for the current tax year, the income you use to determine the amount of your allowable Roth contribution is based only on the current tax year, which ends on December 31.
Example: To determine whether your modified AGI is within allowable Roth IRA limits for 2024, you would calculate your compensation from Jan. 1 to Dec. 31, 2024.
If you’re married, filing jointly for tax year 2024, your modified AGI must be less than $230,000 in order to make a full contribution of $7,000 ($8,000 if you’re 50 and up). From $230,000 to $239,999 you can only make a partial contribution. If you earn $240,000 or more, you are not eligible to contribute to a Roth IRA.
If you need help to determine your allowable contribution, you can use an Roth IRA contribution calculator to estimate what you can save. You may want to consult with a tax professional if you have any questions.
The Takeaway
A Roth IRA can be a useful tool for retirement planning, but it’s important to keep track of how much you’re saving. All IRAs, including Roth IRAs, have strict annual contribution limits. Making excess Roth IRA contributions could result in an unexpected — and costly — tax penalty.
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FAQ
What happens if you accidentally contribute too much to a Roth IRA?
If you make excess Roth IRA contributions the IRS can assess a tax penalty of 6% each year that they remain in your account. You can avoid the tax penalty by withdrawing excess amounts, recharacterizing them, or carrying them ahead for future tax years.
How do you correct excess Roth IRA contributions?
The easiest way to correct an excess Roth IRA contribution is to withdraw the excess amount, along with any interest earned. You can do that before the tax filing deadline, including extension deadlines, to avoid the IRS tax penalty. You cannot correct or recharacterize excess contributions once the tax-filing and extension deadlines have passed for the relevant tax year.
What is the penalty for excess IRA contributions?
A 6% tax applies to excess IRA contributions. The penalty applies each year that the excess contributions remain in your retirement account.
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