What Happens If You Contribute Too Much to an IRA?

An individual retirement arrangement, or IRA, is an easy way to save for retirement because it offers tax savings and a wide variety of investment choices. But an IRA can come with hefty penalties if you break one of the rules. A common mistake is contributing too much to an account.

When Is the IRA Contribution Deadline?

The deadline to contribute funds to an IRA is the tax deadline of the following calendar year. Most years, the tax filing deadline is April 15 or the first weekday after April 15 if it falls on a weekend or holiday.

For example, the deadline to contribute to an IRA for the 2022 tax year would be April 18, 2023.

If you’re under age 50, the maximum allowable contribution for a traditional or Roth IRA is $6,500 in 2023 and $6,000 in 2022. There is a $1,000 catch-up contribution for those age 50 or over, bringing their maximum contribution to $7,500 for 2023 and $7,000 for 2022.

You can contribute to more than one IRA if the total amount doesn’t exceed your allowable limit. For example, if you’re younger than 50, you could put $3,000 in a traditional IRA and $3,500 in a Roth IRA in 2023.

What Are the Income Limits for Roth IRA Contributions?

You can only make contributions to a Roth IRA if your modified adjusted gross income doesn’t exceed the following IRA contribution limits (2023 Roth IRA income limits):

  • $153,000 for taxpayers who file as single, head of household or married filing separately (if you didn’t live with your spouse during the year)
  • $10,000 for taxpayers who file as married filing separately (if you lived with your spouse at any time during the year)
  • $228,000 for taxpayers who are qualifying widow(er)s or married filing jointly

So, if you contribute to a Roth IRA and make more money than expected, you might have to withdraw all your contributions.

What If You Contribute Too Much?

What happens if you overload an IRA by mistake?

It’s not uncommon to realize you contributed too much at the end of the year. The good news is that you can correct excess contributions without penalty if you do so promptly.

For example, let’s say Polly is 30 years old, earned $70,000 in 2022, and contributed $7,500 to her traditional IRA. Since her allowable limit is only $6,500, she has an excess of $1,000 in the account. If Polly withdraws the surplus plus any earnings she made on or before the due date of her tax return, she will avoid the penalty.

If she can’t complete the paperwork for an IRA withdrawal before taxes are due, she can file for a tax extension using Form 4868, Application for Automatic Extension of Time. Filing for an extension will give Polly an additional six months to file – plenty of time to correct her mistake.

How to Correct an IRA Contribution Mistake

Note that Polly has to withdraw her excess contribution and its earnings. While she can withdraw her excess contribution without tax or penalty, she must pay an early distribution penalty on its gains. Distributions you take from an IRA before you reach age 59½ are subject to a hefty 10% penalty. So Polly has to make things right with the IRS by paying ordinary income tax plus the 10% penalty on the $50 she made from her excess contribution of $1,000.

What Happens If I Don’t Correct Excess IRA Contributions?

Once you realize that you contributed too much to an IRA, contact your IRA custodian or a tax professional immediately. If you don’t withdraw your excess contribution by the deadline, it will be subject to a 6% tax penalty each year it remains in your IRA.

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