How to report excess Roth IRA contribution?
If you contribute more than the annual contribution limit for Roth IRA, you will have an excess contribution in your Roth IRA. Find out how to report the excess Roth IRA contribution.
If are eligible to contribute to a Roth IRA, you can make after-tax contributions to the account. However, you should pay attention not to exceed the IRS limits for Roth IRA contributions. For 2022, you can contribute up to $6,000, or $7,000 if you are 50 or older. If your IRA contributions exceed these limits, you must report the excess contribution when filing returns.
If you made an excess contribution to your Roth IRA, you must report the excess amount in IRS Form 5329. You must complete part 3 of this tax form for traditional IRAs and part 4 for Roth IRAs. You will owe a 6% penalty on the excess contribution for each year the excess amount remains in the account.
Roth IRA Contribution Limits
To be eligible to contribute to a Roth IRA, you must meet Roth IRA income limits. If you are a single person, your MAGI must be below $140,000 in 2021 or below $144,000 in 2022. If you are married filing jointly, your MAGI must be below $208,000 in 2021 or $214,000 in 2022.
For 2022, the maximum Roth contribution is $6000, or $7000 if you are 50 or older. The contribution limit applies to traditional IRA and Roth IRA cumulatively. This means that you cannot contribute $6000 each to multiple IRAs. Rather, if you contribute $5,000 to a Roth IRA, you can only contribute an additional $1000 to a traditional IRA, or $2,000 if you are above 50.
Excess Roth IRA Contributions
While it is good to max out your IRA contributions, it is surprisingly easy to exceed the IRS limit. Any excess contributions in your IRA are considered ineligible contributions, and they can trigger a penalty from the IRS. Here are some possible causes of excess contributions:
- Excess contributions can occur due to the following reasons:
- Contributions exceed the annual contribution limit
- Contributions exceed earned income for the year.
- Your MAGI exceeds the income limit
- Ineligible rollover contributions into Roth IRA
The best way to avoid these mistakes is to keep track of the amount you contribute to the account every time. If you received a bonus that you want to add to your retirement account, you must track how much more you can contribute to avoid exceeding this limit.
Penalty of Roth IRA Excess Contributions
If your contributions exceed the annual limit for Roth IRA contributions, you will owe a 6% penalty on the excess funds in your account. You will pay the penalty for every year the error remains unsolved.
For example, assume that Jane contributed $10,000 to her Roth IRA, but the IRS limit is $6,000. This means that she contributed $4000 more than the IRS limit for Roth IRA contributions. If Jane doesn’t correct the excess contribution by the tax deadline of the following year, she will owe a $240 (6% of $4000) penalty.
Instead of withdrawing the excess contribution, Jane can decide to contribute less in the following year so that the excess contribution goes into her regular contribution. However, if she contributes to the Roth IRA for the next year up to the annual contribution limit, and the excess contribution remains in the account for the second year, she will owe another $240 penalty until when the issue is fixed.
How to Report Excess Roth IRA Contribution
If your Roth IRA contribution exceeds the annual contribution limit, you will have an excess contribution in your account. You will pay a 6% penalty on the excess contribution for each year the excess funds remain in your account. If you have not corrected the excess contribution, you must file IRS Form 5329 to calculate the penalty you will pay on the excess contribution.
How to Correct Excess Roth IRA Contributions
If you identify the mistake before the tax deadline for federal tax returns, you should fix the excess contribution and any earnings attributable to the excess funds. Here are ways to correct the excess contribution:
Withdraw excess contribution
If you spot the mistake before the tax filing date, you can remove the excess contribution and any gains attributable to the excess contribution. You can remove the excess contribution by April 15, or by the ended deadline on October 15.
If you have already filed the annual return when you remove the excess amount in your Roth IRA, you must file an amended tax return. If you are below 59 ½, you will pay income tax and a 10% penalty for early distributions.
Apply excess contribution to the next year
You can correct the excess contribution in your Roth IRA by applying this amount to the following year’s contributions. You can contribute less amount in the next year, and top up the contributions with the excess amount. For example, if you contributed $7000 instead of $6,000 in the past year, you can apply the excess $1000 so that you will only contribute $5,000 in the next year. You will still pay the 6% penalty for the year the excess amounts that remained in the Roth IRA.
Withdraw excess contribution in the following year
If you did not correct the excess contribution before the tax deadline, you can wait until the next year to withdraw the money. You must withdraw the excess money by December 31 of the following year to avoid incurring another penalty in the next year. You will only remove the excess contribution and not the earnings attributable to the additional contribution. You will still pay income tax on the excess contribution, and an early withdrawal penalty if you are below 59 ½.