Just by contributing to your individual retirement account (IRA), you’re ahead of the game. But you could wind up with a flag on the play if you accidentally overcontribute or mistakenly contribute if you’re ineligible.
The good news? If you catch your overcontribution before the tax-filing deadline, you may be able to correct your mistake without paying a penalty. Here’s how to figure out if you’ve contributed too much to your Roth IRA or traditional IRA and how you can fix any excess contributions.
How you might contribute too much to your Roth IRA or traditional IRA
The IRA contribution limits are the combined limits for both traditional IRAs and Roth IRAs. That means if you’re contributing regularly to both or contributing to accounts across different IRAs, it’s very possible to overcontribute.
Also, your eligibility to contribute to a Roth IRA is determined on your income, specifically, your modified adjusted gross income (MAGI), which is your adjusted gross income with some deductions and credits added back in. If you contributed to your Roth IRA early in the year and then earned more income than you expected, you may no longer be eligible to contribute to a Roth IRA. If you have any questions on how much you’re eligible to contribute, check out our IRA contribution calculator.
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Options if you’ve contributed too much to your Roth IRA or traditional IRA
If you’ve contributed too much to your IRA and/or Roth IRA, you have until the extended filing deadline (normally October 15 the year your taxes are due) to fix the mistake.
If you file for a tax extension, you’re still on the hook to pay all taxes by your unextended filing deadline, or you may incur a failure-to-pay penalty. If you notice that you’ve overcontributed to an IRA after you filed your taxes, you may have to file an amended tax return.
Any investment earnings your excess contributions generated while in your account will have to be reported on your taxes as income in the year you made the contributions to your IRA. If you don’t remove excess contributions and any investment earnings from those contributions by the tax filing deadline plus any extensions, you may have to pay a 6% penalty on those contributions every year until they are removed. Visit the IRS for more information on tax penalties for IRAs.
Note: As recently passed in the SECURE 2.0 Act, investment earnings on excess contributions will not incur an additional 10% early withdrawal penalty if they are removed by the tax-filing deadline. Excess contributions were not and are still not subject to an additional 10% penalty, but you may still be required to pay the 6% excise tax.
If you contributed too much you have 3 options to fix the excess contribution.
1. Complete a return of excess contribution form
To remove excess contributions from a Roth IRA or traditional IRA at Fidelity, you will need to complete an IRA Return of Excess Contribution RequestLog In Required . It can be helpful to look up a few details about your contribution before you start the process: the date you made your contribution, the exact amount you need to withdraw, and whether you have enough cash in your account to complete your withdrawal. Otherwise, you may have to sell some of the holdings in your IRA to finance your withdrawal. It’s also a smart idea to consult a tax advisor to make sure you get everything reported correctly.
2. Recharacterize your contributions
If you've made an excess contribution to a Roth IRA because your income is too high to contribute for that tax year, you can request these contributions be moved into a traditional IRA. This is called recharacterizing your Roth IRA contributionsLog In Required . Just make sure that you’re still under the combined maximum for both accounts.
If you recharacterized, check if you’re now eligible for any income tax deductions based on your new traditional IRA contributions. Consult a tax advisor before recharacterizing any contributions as a wrong move could trigger more costly tax penalties.
3. Apply contributions to the next year
If you meet the income limit for the type of retirement account you’re contributing to, you could also apply your excess contributions to the next year, which means they’ll count toward the following year’s contribution limit. Before considering this correction method, first make sure to verify that the carried over excess will be eligible within next year’s limits. And, again, reach out to a tax professional if you have any questions.