What is an Excess IRA Contribution?
An excess IRA contribution occurs when you deposit more into your IRA than the IRS allows for the year. This can trigger a 6% penalty (excise tax) each year the excess stays in your account — so it’s important to catch and fix it early.
How to Fix an Excess IRA Contribution
You generally have two ways to correct the mistake:
- Apply the Excess Next Year
If you don’t contribute the full allowable amount next year, the excess can roll forward and count toward that year’s contribution. However, you’ll still owe the 6% penalty for the first year.
Example:
Olive contributed $7,500 in 2024 when her limit was $7,000.
- She owes a $30 penalty (6% of $500) for 2024
- If she contributes only $1,000 in 2025 (with a $7,000 limit), the extra $500 from 2024 can count toward 2025
- Withdraw the Excess Before the Tax Deadline
If you discover the excess before filing your return (including extensions), you can withdraw both the excess and any earnings it generated — and avoid the penalty entirely.
How to Calculate the Earnings (or Losses)
When withdrawing excess contributions, you must also remove any investment earnings tied to them. This is often calculated by your IRA custodian, but sometimes falls on your CPA or tax advisor.
Example 1: Your IRA Grew in Value
- Claudio overcontributed $1,000
- His IRA increased 5.3%
- He must withdraw $1,053 ($1,000 + $53 earnings)
Example 2: Your IRA Lost Value
- Same $1,000 excess
- IRA declined in value
- He only needs to withdraw $958 ($1,000 – $42 loss)
These calculations are the same for Roth IRAs, SEP IRAs, and SIMPLE IRAs.
A Common Oversight — Easily Avoided
Many taxpayers don’t realize they’ve exceeded the limit, especially if they contribute automatically or have multiple accounts. Working with a qualified CPA in Los Angeles or a knowledgeable tax advisor can prevent these issues and save you from avoidable penalties.
Need Help Fixing an IRA Mistake?
Excess contributions can be tricky — especially when earnings, penalties, and deadlines are involved. Let the team at Velin & Associates, Inc. help you sort it out quickly and correctly.
- Personalized guidance
- IRS-compliant calculations
- Peace of mind with your retirement planning
🔎 Let’s get your IRA back on track. Visit www.losangelescpa.org or call us at 323-902-1000 to schedule a consultation.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.