What If I Put Too Much in My Traditional IRA?
The Internal Revenue Service sets limits on annual contributions to IRA accounts and can assess penalties when you make excess contributions. What happens if you put too much in a traditional IRA depends on when you remove the extra money. If you act quickly enough, you may not have to pay a penalty.
A contribution to a traditional IRA that is greater than the limits set by the IRS counts as an excess contribution and is subject to a 6 percent penalty tax. The tax is levied each year the extra money remains in your account. For example, if you contributed $500 too much, the penalty tax is $30 per year until you remove the excess. The penalty amount is limited to 6 percent of the balance in your IRA.
As of 2012, you are limited to a contribution of $5,000 per year to a traditional IRA or your adjusted gross income, whichever is less. If you are married and file a joint return, you may contribute to your IRA even if you don't have earned income but your spouse does. The limit goes up to $6,000 when you turn 50 years old. Any contribution that is more than these limits counts as excess. You can't contribute to a traditional IRA after age 70 1/2. If you do, the IRS counts it as an excess contribution. If you improperly roll over funds from another retirement account to an IRA, the rollover counts as an excess contribution. However, properly executed rollovers do not count as contributions.
The IRS allows a grace period during which you can remove excess IRA contributions without penalty. The deadline is the due date for filing your tax return, including extensions. If you realize you added too much money after you file your return, you can still avoid the 6 percent penalty by removing the extra money and filing an amended return by your filing deadline, including extensions.
To remove excess contributions from a traditional IRA, follow your IRA account provider's procedures for making an IRA withdrawal. Inform your account trustee of the reason for the withdrawal. You must take out the extra money you put in and any investment gains, or earnings, attributable to the excess contribution. Report these earnings as income on your tax return. The IRS counts the withdrawal of these earnings as an early distribution if you are not yet 59 1/2 years old, so you may have to pay a 10 percent penalty and regular income taxes on the earnings. Complete IRS Form 8606 and attach it to your tax return to document the removal of the excess contribution and earnings.
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.