Course: Retirement Planning
Lesson 1: Using IRAs to Build and Distribute More Retirement Income

Student Question:

Hi Bruce-

If an IRA owner over-contributes to his IRA, the owner must remove the excess contribution AND the earning on those contributions by the tax filing  date to avoid a 6% tax penalty. However, the 6% penalty tax is only on the excess contribution and not the earnings. Is this correct? What happens if a person removes only the excess contribution (since there isn’t a penalty tax on the earnings)? In effect, could he defer taxes on the earnings of the excess contributions without recourse from the IRS?

Instructor Response:

Hi Amy,

If only that were true!  Here are the dynamics.

  • The taxpayer can avoid the 6% excess penalty if both excess contribution and excess earnings (on excess contribution) are removed by the due date.
  • If the earnings are not withdrawn by the due date, the 6% excess penalty will apply.
  • The earnings on the excess contribution are subject to the 10% premature distribution penalty however, unless the withdrawal qualified for one of the exceptions (see Withdrawals from Traditional IRAs before Age 59½
Thanks for the question!