When contributing to your IRA or most other retirement account, too much of a good thing can cost you. If you contribute more than the stated limit for your type of retirement plan, the IRS will assess a penalty on the excess.
On traditional and Roth IRAs, for example, there are three ways that you can run afoul of the excess contribution penalty:
- Contribute more than the stated limit for your type of plan
- Make a regular contribution to a traditional IRA after age 70 ½
- Make an improper rollover contribution to an IRA
The usual prescription for excess contributions is for the IRS to assess a 6 percent tax on the excess amount per year for as long as that excess stays in the IRA account.
To avoid or stop the penalty, withdraw the excess amount – and any income earned on that amount – from your IRA by the due date of your tax return.
For the excess contribution limit of your plan, check the documentation you received when you signed up for the retirement account, or check out IRS Publication 590 – Individual Retirement Arrangements (IRAs).