By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

‘Tis the season for identifying and correcting excess IRA contributions. It seems as if every other recent inquiry is about this subject. To keep readers on the straight and narrow, here are ten details about excess IRA contributions and the correction process…

1. Excess contributions occur for many reasons, including exceeding the annual IRA contribution limit, making a contribution without eligible compensation, exceeding the Roth IRA phase-out limits, rolling over ineligible dollars (like a required minimum distribution), rolling over dollars after the 60-day period has expired, etc.

2. The deadline to correct an excess contribution without penalty is generally October 15 of the year after the year of the excess. (October 15, 2024 for a 2023 excess.)

3. Corrections initiated on or before the October 15 deadline avoid the 6% excess contribution penalty and can be made via two ways: withdrawing the excess, plus earnings (called the “net income attributable,” or “NIA”); or recharacterizing the excess plus any gains or losses (i.e., from a Roth IRA to a traditional IRA, or vice versa).

4. NIA is taxable in the year IN WHICH the contribution was made. So, the earnings on an excess contribution made in 2023, even if fixed in 2024, are reportable on the 2023 return.

5. IRS Publication 590-A includes a worksheet to calculate NIA. Earnings are based on overall IRA account performance, not just on the investment where the excess dollars sit.

6. Since corrections made by October 15 of the year after the year of the excess will NOT have a 6% penalty, it is NOT necessary to file IRS Form 5329. Also, there is no penalty on the NIA – only taxes due. (SECURE 2.0 eliminated the 10% penalty on NIA for those under age 59 ½.)

7. After the October 15 deadline, excess contributions can be corrected by withdrawing the contribution or by carrying it forward to use in a future year. Recharacterization is no longer available after the deadline. The 6% penalty applies for each year the excess remains as of December 31. The penalty is paid via Form 5329.

8. After the deadline, the NIA can remain in the account. (Odd, but true.) When a correction is made after October 15, only the excess amount needs to be withdrawn.

9. In situations where an excess contribution remained for many years, the 6% penalty applies for EACH year, and a separate Form 5329 is necessary for each year.

10. SECURE 2.0 created a 6-year statute of limitation for correcting excess IRA contributions. However, in a recent case, the U.S. Tax Court ruled that the statute of limitations is NOT retroactive. This means that IRA owners cannot avoid correcting excess contributions made for years before 2022 — they must be addressed. Bonus info: In the court case mentioned above, the excess contribution was over $25 million, and the applicable penalty was nearly $8.5 million! (We suggest you avoid such situations.)