How to Remove Excess Contributions From an IRA

by Nancy Cross

    As of 2012, you can still contribute up to $5,000 -- $6,000 if you are 50 or older -- to one or a combination of IRAs annually, provided you have that much in income. Higher-income earners may also be limited as to whether and how much they can contribute to a Roth IRA based on their adjusted gross income. While you can always contribute the maximum to a traditional IRA, what you can deduct may be limited based on your adjusted gross income if you or your spouse is covered by a plan at work. If at the end of the year you find that you contributed more than allowed, the IRS will allow you to remove your excess contributions without penalty if you follow the regulations.

    Step 1

    Calculate the amount of your excess contribution based on the AGI limits published by the Internal Revenue Service at IRS.gov. As of 2012, for example, Roth contributions begin to phase out at $173,000 for married couples filing jointly and at $110,000 for singles. Contributions are eliminated at an AGI of $183,000 for married people filing jointly and $125,000 for singles.

    Step 2

    Add attributable investment income. In order not to be penalized, you must remove not just your contribution but any income accumulated between the time of the excess contribution(s) and the time of withdrawal. In most cases, your IRA trustee or custodian will calculate that for you. However, if it won't, or if you are running up against the clock, you can use Worksheet 1- 4in IRS Publication 590 to make that calculation.

    Step 3

    Withdraw the amount of your contribution plus earnings before the due date for filing your federal income tax. If you file and are approved for an extension, you have until the extended due date to make your withdrawal. If the contribution was to a traditional IRA, you must not yet have claimed a deduction for your contribution.

    Tip

    • If you made periodic contributions during the year, the last contribution you made is considered to be the first one returned for purposes of calculating attributable income.
    • The amount you must withdraw is the net amount, meaning if your contribution lost rather than gained value, you can reduce the amount you have to withdraw by the loss.
    • You may also carry over excess contributions to the next year as long as they do not exceed the allowable limits for that year.

    Warning

    • There is a 6 percent penalty on excess contributions not withdrawn by the due date.

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    About the Author

    Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).

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