Withdraw excess IRA contributions, or face penalties

Contributing to your retirement accounts is a good thing. But like many good things, too much can get you in trouble. That’s the case when you make excess contributions to your IRA — because those excess contributions may be subject to a 6% excise tax penalty, even if the overage is due to a mistake.

As you know, for 2015 you can contribute up to $5,500 in total to all of your traditional and Roth IRAs (or your taxable compensation for the year, if your compensation was less than the dollar limit). When you contribute more than the limit, the 6% penalty rules kick in.

Here’s how the rules work.

  • Before tax filing deadline. If you withdraw the over-contribution and any related earnings before your tax return is due (including extensions), you won’t have to pay the penalty. The withdrawal may be taxable to you if you took a deduction on your return. Earnings on the contribution while it was in your IRA are included as income on your tax return.

    You also have the option to recharacterize your excess contribution. This can be useful when, for example, you contribute to a Roth and later discover your income was over the limit for making the contribution.

    Note: You have until October 15, 2015, to correct an excess contribution made in 2014.

  • After tax filing deadline. The tax applies each year while the excess contribution remains in your account. You can withdraw the excess to stop the penalty, or you can carry it forward to future years. Just be sure to reduce your regular contributions in those future years.