Excess contribution

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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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Excess Contribution

Contributions made to an IRA over and above the maximum allowable contribution. One must withdraw excess contributions from the IRA in the current tax year or be subject to a 6% excise tax. Excess contributions are banned in order to remove the incentive for excessive tax avoidance.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Any excess contributions, which otherwise would have to have been paid back to the executive and been taxable, remained tax deferred in the nonqualified plan.
Employers may use any reasonable method for allocating income to excess deferrals, excess contributions or excess aggregate contributions.
For excess contributions carried over to future years, the donor has to attach a statement to the return identifying the carryover amounts in each percentage limit category.
He told a regional employee benefits conference for practitioners that excess contributions were the most common problem with section 403 tax-sheltered annuities.
In January 1982 the IRS announced that excess contributions above the ADP limits could not be recharacterized.
4973(a)(4), a 6% excise tax on the excess contributions. According to Sec.
Does a failed Roth IRA conversion result in a distribution from a traditional IRA, including the imposition of the 10% additional tax on early distributions and a 6% excise tax on excess contributions to the Roth IRA?
The key changes affect the following regulations: IRC sections 401(k)--the CODA regulations, 401(m)--matching contributions, 401(a)(30)--disqualification for exceeding limits, 402(g)--dollar limits on elective deferrals and 4979-excise taxes on excess contributions. The general nondiscrimination regulations for qualified plans under IRC section 401(a)(4) and for "permitted disparities" under IRC section 401(l) also are affected.
In a test case, excess contributions to life insurance plans formed under a VEBA plan were dividends to employer-participants and were deductible only to the extent the contributions funded term life insurance.
* Any dollar amounts (such as excess contributions or excess allocations) are insubstantial in view of the entire case.
The 6% excise tax on excess contributions is triggered if contributions for the year exceed $2,000.
Note: With reference to the April 1991 "From The Tax Adviser": The five-year carryover deduction available for excess contributions for individuals also extends to contributions made to private nonoperating foundations.