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.
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 ?
Federal authorities said Preckwinkle kept the legal limit of $5,600, while returning the excess contribution of $4,400.
If a taxpayer contributes more than the statutory limit, the excess contribution is subject to an excise tax of 6% of the excess contribution for each year the amount remains in the IRA.
This amount is also not considered an excess contribution to the HSA and is therefore not subject to the Sec.
There are a few options that can be used, depending on the date that the excess contribution is discovered.
For instance, the rolled-over RMD often becomes an excess contribution, subject to a 6 percent penalty for each year it remains in the new account until it is corrected.
"Driven primarily by public sector activities, backed essentially by domestic demand, characterised by an improved diversification of the economy, and reflected in the decline in the excess contribution of the petroleum sector to GDP growth vis-a-vis the non-petroleum sector, the overall growth process is expected to be sustainable moving forward," indicated the report.
Contributions in excess of the maximum annual contribution (as reduced for high-income contributors) that are not returned before the first day of the sixth month of the taxable year following the taxable year in which the contribution was made are subject to the 6% excess contribution excise tax under Code section 4973(a).
Any excess contribution not allowed will be carried forward indefinitely until claimed as a deduction.
It also observed an excess contribution of Rs 25.114 million to Renewals Reserve Fund to avoid lapse of supplementary grant.
A defined contribution plan is integrated by providing a higher rate of contributions for compensation above a specified earnings level (excess contribution percentage) than for compensation below a specified earnings level (base contribution percentage).
Jayne must use all the excess contribution from 2004 before she can use up the contributions from 2005 or 2006.
For the record, a number of our new BHB fixtures this year means an actual increase in prize-money, with an excess contribution from Northern Racing and not the Levy Board.