Excess IRA Contributions
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- If the earnings are not withdrawn by the due date, the 6% excess penalty will apply.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