Withdraw excess IRA contributions, or face penalties
Tax Tip of the Week
October 5, 2015
Withdraw excess IRA contributions, or face penalties
Contributing to your retirement accounts is a good thing. But like many good things, too much can get you in trouble. That's the case when you make excess contributions to your IRA — because those excess contributions may be subject to a 6% excise tax penalty, even if the overage is due to a mistake.
As you know, for 2015 you can contribute up to $5,500 in total to all of your traditional and Roth IRAs (or your taxable compensation for the year, if your compensation was less than the dollar limit). When you contribute more than the limit, the 6% penalty rules kick in.
Here's how the rules work.
- Before tax filing deadline. If you withdraw the over-contribution and any related earnings before your tax return is due (including extensions), you won't have to pay the penalty. The withdrawal may be taxable to you if you took a deduction on your return. Earnings on the contribution while it was in your IRA are included as income on your tax return. You also have the option to recharacterize your excess contribution. This can be useful when, for example, you contribute to a Roth and later discover your income was over the limit for making the contribution. Note: You have until October 15, 2015, to correct an excess contribution made in 2014.
- After tax filing deadline. The tax applies each year while the excess contribution remains in your account. You can withdraw the excess to stop the penalty, or you can carry it forward to future years. Just be sure to reduce your regular contributions in those future years.
Please call for a full explanation of these and other IRA rules.
"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
© MC 2015
October 5, 2015
Withdraw excess IRA contributions, or face penalties
Contributing to your retirement accounts is a good thing. But like many good things, too much can get you in trouble. That's the case when you make excess contributions to your IRA — because those excess contributions may be subject to a 6% excise tax penalty, even if the overage is due to a mistake.
As you know, for 2015 you can contribute up to $5,500 in total to all of your traditional and Roth IRAs (or your taxable compensation for the year, if your compensation was less than the dollar limit). When you contribute more than the limit, the 6% penalty rules kick in.
Here's how the rules work.
- Before tax filing deadline. If you withdraw the over-contribution and any related earnings before your tax return is due (including extensions), you won't have to pay the penalty. The withdrawal may be taxable to you if you took a deduction on your return. Earnings on the contribution while it was in your IRA are included as income on your tax return. You also have the option to recharacterize your excess contribution. This can be useful when, for example, you contribute to a Roth and later discover your income was over the limit for making the contribution. Note: You have until October 15, 2015, to correct an excess contribution made in 2014.
- After tax filing deadline. The tax applies each year while the excess contribution remains in your account. You can withdraw the excess to stop the penalty, or you can carry it forward to future years. Just be sure to reduce your regular contributions in those future years.
Please call for a full explanation of these and other IRA rules.
"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
