Excess contribution

Excess contribution

The amount by which an IRA contribution exceeds the allowable limits. If an excess contribution is not properly corrected, a 6% IRS penalty applies.

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Excess contribution. An excess contribution occurs when you put more money into your individual retirement account (IRA) than the law allows.

You can withdraw the excess amount plus earnings by the date your tax return is due for the year, including extensions. You'll owe tax on the excess in the year you deposited it in your account but no penalty. Earnings are taxed in the year you receive them.

If you leave the excess in the IRA, you'll owe a 6% excise tax on that amount every year it remains in the account. If you miss the deadline for taking the money out without penalty, one solution may be to contribute less the following year so that your combined contributions are less than the total for the two years.

The term excess contributions may also be used to describe after-tax contributions that employees may legally make to their employer-sponsored retirement plans. This situation may arise if your yearly contribution to the plan, based on the percentage of salary your employer permits, is less than the annual federal limit.

Finally, plan sponsors may owe a 10% tax penalty if their plans do not distribute or correct excess contributions within two and a half months after the end of the plan year.