What to Do About an Excess Roth IRA Contribution
Over-contributing isn't a difficult problem to fix
Tax planning and saving for retirement require a lot of attention to detail on an ongoing basis. It's surprisingly easy to contribute too much to your Roth IRA if you're not paying attention or if you don't understand the rules. You have three options for fixing the problem. You can take the extra money back, you can bump it over to the following year, or you can transfer the excess to a traditional IRA.
Understanding Roth IRAs
Unlike traditional IRAs, you can't claim a tax deduction for contributions you make to a Roth IRA. Contributions are made with after-tax dollars, but you'll gain some benefit in exchange for this.
You can take distributions tax-free in most cases because you've already paid taxes on your contributions. Earnings are tax-free as well, subject to certain rules. You won't have to take required minimum distributions (RMDs) as you would with a traditional IRA. You can leave your money in a Roth IRA as long as you like.
Roth IRA Contribution Limits
Most people can contribute up to $6,000 to a Roth IRA account as of 2020. You can make an additional "catch up" contribution of $1,000 a year, for a total of $7,000, if you're age 50 or older.
Contributions can be reduced depending on your modified adjusted gross income (MAGI) and your filing status, however. As of 2020, you can contribute the full $6,000, or $7,000 if you're age 50 or older, if your AGI is:
- Less than $196,000 if you're married and file a joint return with your spouse
- Less than $10,000 if you're married but file a separate return unless you didn't live with your spouse at any time during the tax year
- Less than $124,000 if you're single, qualify for the head of household filing status, or you're married but didn't live with your spouse
Contribution limits begin decreasing when these income thresholds are met, and they reach zero at incomes of $206,000 for married filers of joint returns and $139,000 for single, head of household, and married filers of separate returns who didn't live with their spouses. There's no phase-out for married filers of separate returns who lived with their spouses. Their contribution limit is zero if their AGIs are $10,000 or more.
Contribution limits increase periodically to keep pace with inflation.
These contribution limits cover both traditional and Roth IRAs. You can't contribute $6,000 to one and $6,000 to another if you maintain both types of accounts, nor can you contribute $6,000 each to multiple Roth IRAs. Total contributions can't exceed $6,000 or $7,000 a year, depending on your age.
Going Over the Limit: An Example
Let's say Sarah is 45 years old and she sees that the $6,000 annual limit applies to her because she's not yet 50. She decides to contribute $600 each month for 10 months from March through December so she's maxed out her Roth IRA contributions by the end of the year.
Then, as she's working on her tax return the following spring, Sarah realizes that Roth IRA contributions are also limited based on income—something she was unaware of at the time she was making contributions.
A single person's maximum Roth IRA limit begins decreasing when her modified adjusted gross income (MAGI) exceeds $124,000. She becomes ineligible to contribute at $139,000 as of 2020.
It turns out that Sarah's MAGI for the year is $135,000. This falls in between the starting point and the ending point of the income range where Roth IRA contributions are phased out and eventually eliminated entirely. Sarah's $6,000 contribution was actually more than what she was allowed to contribute based on her income. Sarah has three options to fix this.
Withdraw the Excess Contribution
A withdrawal is the removal of assets from a retirement account so the amount withdrawn doesn't count toward a person's contributions for that particular tax year. According to the IRS, you can withdraw contributions on or before the due date for filing your tax return.
You must also withdraw any earnings on the excess contributions. Earnings are considered earned and received in the tax year during which the excess contribution was made.
You can withdraw contributions from a Roth IRA up until the Oct. 15 extended deadline if you've requested an extension of time to file your tax return. Withdrawals aren't treated as distributions. They're like an "undo" function. It's as though the contribution was never made in the first place.
You must withdraw any earnings along with the underlying principal if the money you contributed produced any interest or dividends while it was sitting in the Roth IRA. For example, the total amount of your withdrawal would be $1,010 if you're withdrawing $1,000 and that $1,000 earned $10 interest—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.
If You've Already Filed Your Tax Return
There's a special rule that lets you withdraw contributions until Oct. 15 even if you don't file for an extension. You can withdraw some or all of your Roth IRA contributions up to six months after the original due date of your return, which would be Oct. 15 for most people. You must then file an amended federal tax return after withdrawing the funds from your Roth IRA.
You might need to amend your state tax return as well. Check with a local tax professional to be sure.
Move the Contribution to the Next Tax Year
The IRS also lets you apply any contributions that are over the limit toward the following year.
Let's say Robert has 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 2019 and contribute the same $1,000 for tax year 2020. The withdrawal and re-contribution are combined into one action.
Simply instruct your IRA plan administrator that you're applying a certain contribution amount to the next tax year.
The IRS says that you can apply the excess contribution in one year to a later year as long as the total contributions for that later year are less than the contribution limit for the year.
Move the Money to a Traditional IRA
Moving the money over to a traditional IRA is referred to as "re-characterizing" a 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.
According to the IRS, you must have the contribution transferred from the IRA to which it was made to the second IRA in a trustee-to-trustee transfer in most cases. You can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA if the transfer is made by the due date for your tax return for the tax year during which the contribution was made. This includes extensions.
The IRS says that you must also:
- Include any earnings
- Report the recharacterization on your tax return
- Treat the contribution as having been made on the date it was made to the first IRA
If You Do Nothing
You'll have to pay a special tax if you decide to do nothing—an excise tax of 6% as of 2020. The tax applies to the amount of your contribution that exceeds your limit for the year, and it's calculated and reported on Form 5329.
You might think that 6% doesn't sound too bad. Maybe you should just leave the money parked in the Roth IRA if the funds can grow faster than that over time. A 6% "fine" wouldn't be too significant if it was just a one-time tax hit, but that's unfortunately not the case. The 6% excise tax kicks in each and every year that the excess contributions remain in your IRA.
Paying the Tax
Alicia contributed $6,000 to her Roth IRA, but her actual maximum limit was $1,600. Alicia contributed $4,400 more to her Roth IRA than she was permitted to contribute. She didn't correct the excess contribution by Oct. 15. Alicia owes a 6% excise tax on her excess contribution, or $264.
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, so she decides not to make any additional Roth contributions. In this situation, $2,200 of her $4,400 in excess contributions is carried over and absorbed into the new year. Her new excess amount drops to $2,200 with a corresponding excise tax of $132.
In this scenario, Alicia would pay $396 in excise tax over two years. The excess contribution will have been corrected by not contributing any new savings to her Roth IRA. The excess contribution has been fixed by the third year and no additional excise tax would be paid to the IRS.
IRS. "Roth IRAs." Accessed April 16, 2020.
IRS. "Retirement Topics - IRA Contribution Limits." Accessed April 16, 2020.
IRS. "Amount of Roth IRA Contributions That You Can Make for 2020." Accessed April 16, 2020.
IRS. "Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs)." Accessed April 16, 2020.
IRS. "IRA FAQS - Recharacterization of IRA Contributions." April 17, 2020.
IRS. "IRA Year- End Reminders." Accessed April 16, 2020.