Tax Implications for Contributing Too Much to Roth IRA

by Mark Kennan

A Roth IRA offers tax-free qualified withdrawals and tax-sheltered growth, but the Internal Revenue Service limits the total amount that you may contribute annually to your account. Knowing when you are over your Roth IRA contribution limit, and your options if you contribute too much, helps you minimize the tax implications.

How Much Is Too Much?

Each year, the IRS sets the annual limit for the most that anyone may contribute to a Roth IRA. As of publication, that limit is $5,000 for anyone under age 50 and $6,000 for those 50 and older. Your limit, however, may be lower, either because you have too little compensation or because your modified adjusted gross income is too high. Your Roth IRA contributions for the year cannot exceed your compensation, so if you only earn $3,000, any contribution over $3,000 is considered an excess contribution despite the standard contribution limit being higher. Also, if your modified adjusted gross income falls in the phaseout range, your annual contribution limit will be lower than the standard amount.

Correcting Excess Contributions

To correct your excess contribution to your Roth IRA, you need to withdraw the excess amount plus any earnings on the excess before your income tax return is due. For example, if you put in an extra $1,000 and when you go to take it out, that $1,000 has grown to $1,200, you would have to withdraw $1,200. If you took a loss, you can withdraw less than you put in to meet your obligations. For example, if you contributed an extra $500 but the value decreased to $480, you would only have to take out $480.


If your excess contribution remains in your Roth IRA, you must pay a 6-percent penalty on the excess contribution. For example, an $800 excess contribution results in a $48 income tax penalty when you file your income tax return. This penalty continues each year that your Roth IRA has too many contributions in the account. When you file your income taxes, report the penalty with Form 5329.

Applying Excess the Following Year

Depending on the size of your excess contribution, you may decide to leave the money in the Roth IRA, pay the penalty, and use the excess to count toward the contribution limit for the next year. For example, if your annual contribution limit equals $5,000 in 2011 and 2012, if you put $6,000 in during 2012, you could pay the excess contributions penalty on the extra $1,000 in 2011 and then use that $1,000 as part of your $5,000 contribution limit the following year.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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