The Withdrawal of Excess Traditional IRA Contributions

by W D Adkins

    When you add money to an individual retirement account improperly, the Internal Revenue Service deems it an excess contribution. For example, you might roll over funds from another retirement account incorrectly or simply deposit too much money into the account during the year. You'll want to withdraw excess traditional IRA contributions as soon as possible to avoid or minimize penalties.

    Time Frame

    You can avoid IRS penalties by withdrawing excess contributions plus earnings attributable to them by your tax filing deadline, including extensions. If you discover the mistake after you have filed your return, you can withdraw the money within six months and file an amended return. You may choose to make a reduced contribution to your traditional IRA the next year instead of withdrawing the excess amount. For example, if you put in $1,000 too much in 2012, you can remove the excess amount by contributing only $4,000 in 2013.

    Procedure

    To withdraw excess contributions, first determine how much extra you put into your traditional IRA. Next, figure the amount of earnings attributable to the excess money. Calculating earnings may require the help of your account trustee. Follow your IRA provider's procedures for withdrawing the excess contributions and earnings. You will need to complete IRS Form 8606 and report the earnings as income on your tax return. If you are not yet 59 1/2 years old, the withdrawal of earnings counts as an early distribution and may incur a 10 percent tax penalty.

    Contribution Limits

    IRS rules limit you to a maximum contribution of $5,000 per year, or $6,000 if you are age 50 or older, as of 2012. In addition, you must have earned income that is as much as or more than the amount you contribute. Your contribution limit is figured based on the total you add to all of your IRA accounts put together. Suppose you have a limit of $5,000 and a traditional IRA account plus a Roth IRA account. If you put $3,500 into each, the $7,000 total means you have an excess contribution of $2,000.

    Penalty

    The IRS levies a 6 percent penalty tax on excess contributions to a traditional IRA each year the extra money remains in the account. The penalty is limited to 6 percent of the amount in all of your IRA accounts combined. If you follow IRS rules to roll over funds from another retirement plan such as a 401(k), don't be concerned. Rollover funds are not contributions and do not count toward the contribution limit. You are not supposed to contribute to a traditional IRA after you reach age 70 1/2. If you make a contribution after that time, the IRS counts it as an excess contribution that is subject to the 6 percent penalty.

    About the Author

    Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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