The Internal Revenue Code sets strict limits on how much you can contribute to your combined IRA accounts -- whether Roth or traditional -- each year. Confusion about the limits can lead to an account holder's exceeding the contribution limit. Making contributions early in the year, forgetting about them and adding more funds to the IRA before April 15 can also result in excessive contributions. Whatever the reason for the transgression, excess contributions are automatically applied to the succeeding tax year(s). Unfortunately, an excise tax is also applied.
1. Find out what your maximum allowable contribution for the following tax year will be. Contribution limits are regularly revised. Check the IRS website or consult a tax professional to be sure you have current data.
2. Deduct the maximum contribution for the following (and subsequent) year(s) from the amount of the excess contribution. For example, if your excess amounted to $9,000 and your contribution limit for the following year is $5,000, subtract $5,000 from $9,000 to arrive at $4,000. At the end of the following year, your excess stands at $4,000. Deduct $4,000 from your contribution limit for the succeeding year to arrive at -$1,000. By the end of the second year, you will have resolved the excess contribution issue.
3. Pay the excise tax of 6 percent on the amount of excess that remains in your account at the end of the current year and of any applicable subsequent years. Calculate the excise tax by multiplying 0.06 by the excess amount. Continuing with the above example, at the end of the current tax year, your excess is $9,000. $9,000 times 0.06 equals $540. For the following tax year, multiply $4,000 times 0.06 to arrive at $240.
- You may need to file amended tax returns.
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