What to Do if You Contributed Too Much to Your Roth IRA

Over-Contributing Isn't a Difficult Error to Fix

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Tax planning and saving for retirement both require attention to detail, not just now and then but on an ongoing basis. You can easily contribute too much savings to your Roth IRA if you're not on your toes. There are four ways to fix this problem. All are pretty straightforward—just pick the solution that works best for your goals.

You're Over the Limit

Most people can contribute up to $5,500 a year to a Roth IRA account as of 2017.

If you're age 50 or older, you can contribute make an additional "catch up" contribution of $1,000 for a total of $6,500.

So let's say Sarah is 45 years old and she sees that the $5,500 annual limit applies to her because she's not yet 50. She decides to contribute $550 each month for ten months from March to December so that by the end of the year, she has maxed out her Roth IRA contributions. Sounds like a great plan, right?

Not necessarily. As she's working on her tax return the following next spring, Sarah notices that Roth IRA contributions are also limited based on income—something she was unaware of at the time she was making contributions. As of 2017, a single person's maximum Roth IRA limit begins decreasing when her modified adjusted gross income reaches $118,000. When modified adjusted gross income reaches $133,000, the maximum amount that a single person can contribute to her Roth IRA is reduced to zero.

Sarah had contributed to her Roth IRA based on her salary of $100,000, but after bonuses and investment income, it turns out that her modified adjusted gross income is $125,000. This falls in between the starting point and the end point of the income range where Roth IRA contributions are phased out and eventually eliminated entirely.

Sarah's $5,500 contribution was actually more than what she was allowed to contribute based on her income. So what can she do about the extra money she put in the Roth IRA?

Withdraw the Excess Contribution

A withdrawal is the removal of assets from a retirement account so the amount withdrawn does not count towards a person's contributions for that particular tax year. According to the IRS: 

"For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made." 

So contributions to a Roth IRA can be withdrawn on or before the due date for filing the tax return, including any extensions. This means that you can withdraw contributions from a Roth IRA on or before the April 15 deadline for filing your return for the previous tax year. If you've requested an extension of time to file your return, you can withdraw contributions from a Roth IRA up until the October 15 extended deadline.

Withdrawals are not treated as distributions. They're like an "undo" function on your computer. It's as if the contribution was never made in the first place.

If the amount of money has earned any interest or dividends while it was sitting in the Roth IRA, you must withdraw that income along with the underlying principal. For example, if you are withdrawing $1,000 and that thousand dollars has earned $10 interest, the total amount of your withdrawal would be $1,010—your original contribution plus the earnings on that amount.

Your IRA plan administrator knows how to handle this situation because it happens often enough. Try calling first to find out if the plan can help you fix the problem over the phone. The administrator might ask you to submit your request in writing.

When You've Already Filed Your Tax Return 

There's a special rule that lets you withdraw contributions until October 15 even if you don't didn't file for an extension.

For example, you filed your personal tax return on or before the April deadline, and you didn't request an extension. After filing, you realize that you contributed too much money to your Roth IRA. You can withdraw some or all of your Roth IRA contributions up to six months of the original due date of the return, which would be October 15 for most people.

Then, after withdrawing the funds from your Roth IRA, you must file an amended federal tax return. You might also need to amend your state tax return.

Move the Roth Contribution to the Following Tax Year

What if you want to keep your funds invested in the Roth IRA? The IRS lets you apply any contributions that are over the limit toward the following year. Let's say that Robert needs to withdraw $1,000 of his Roth IRA contributions because he's over the limit based on his income. He can simultaneously withdraw $1,000 from his contributions for tax year 2017 and contribute the same $1,000 for tax year 2018. The withdrawal and re-contribution is combined into one action where you simply instruct your IRA plan administrator that you are applying a certain contribution amount to the next tax year. The IRS says:

"If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year."

Move the Money to a Traditional IRA

This is referred to as re-characterizing an IRA contribution. You're changing the character of the contribution from a Roth contribution to a traditional IRA contribution. You can re-characterize IRA contributions up until the due date of your tax return, including extensions. That means that as long as you get an extension, you can perform a re-characterization up until October 15. According to the IRS: 

"You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called re-characterizing the contribution.

"To re-characterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you re-characterize your contribution, you must do all three of the following.

  • "Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount.
  • Report the recharacterization on your tax return for the year during which the contribution was made.
  • Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA."

The IRS spells out the special rules covering specific situations in the recharacterizations section of Publication 590-A.

Do None of the Above 

There's a special tax just for this situation, an excise tax of 6 percent. The excise tax applies to the amount of your contribution that exceeds your limit for the year. It's calculated and reported on Form 5329

You might think that 6 percent doesn't sound too bad. If the funds can grow faster than that over time, maybe you should just leave the money parked in the Roth IRA. You're right that a 6-percent "fine" might not be too bad if it's just a one-time tax. But it's not a one-time tax.

The 6 percent excise tax kicks in each and every year "as long as the excess contributions remain in the IRA," according to a public service announcement distributed to the press by the IRS. 

Here's an example of how this would work out. Say Alicia contributed $5,500 to her Roth IRA, but her actual maximum limit was $2,200. Alicia contributed $3,300 more to her Roth IRA than she was permitted to contribute. She didn't correct the excess contribution by October 15. Now Alicia owes a 6-percent excise tax on her excess contribution, or $198.

She discovers the error the following spring when she's working on her taxes. She's eligible to contribute $2,200 to her Roth IRA for this new year, and decides not to make any additional Roth contributions. In this situation, $2,200 of her $3,300 excess contributions is carried over and absorbed into the new year. Her new excess amount drops to $1,100 with a corresponding excise tax of $66.

Now let's suppose this same scenario repeats itself again the next year. Alicia's remaining $1,100 excess contribution gets absorbed by the difference between how much new money she contributes to her Roth IRA and her actual Roth IRA contribution limit for that year. 

In this scenario, Alicia would pay $264 in excise tax over two years. The excess contribution has been corrected by not contributing new savings to her Roth IRA. By the third year, the excess contribution has been fixed and no additional excise tax would be paid to the IRS.