What to do with excess contribution in your retirement account?

August 23
7:46 AM 2015

There are many ways you might have contributed too much to your IRA without knowing it.  Maybe the full amount was contributed to both a traditional and a Roth IRA.  Perhaps you set up a monthly contribution that automatically pays and forgot to put a stop to it before your contribution limit exceeded. Or, maybe you just screwed up.

Excess contribution is defined as any amount that is greater than the IRS-imposed contribution limit - $5,000 in 2012 for people younger than 50 - or your earned income for the year, whichever is smaller, constitutes an excess contribution.

Bob Phillips, a CPA, Certified Financial Planner and managing principal of Spectrum Management Group in Indianapolis said, "Using a 401(k) or IRA (Individual Retirement Account) can be a powerful, tax-advantaged way to save for retirement, because your investment grows tax-deferred, and the contributions you make now can help reduce your taxable income."

401(k) is a retirement savings plan sponsored by an employer that lets workers saves and invests a piece of their paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account.

While a 401(k) can help you save, it has plenty of restrictions and caveats.  In most cases, you can't tap it into your employer's contributions immediately. Vesting is the amount of time you must work for your company before gaining access to its payments to your 401(k).

For 2015, the contribution limits are $18,000 for a 401(k) adding an extra $6,000 in catch-up contributions if you're 50 or older) and $5,500 for IRA's (adding another $1,000 for those 50 and older).  

If you have an excess contribution, IRS will fix that mistake.  But you have to act quickly as IRS also imposes a penalty and it applies annually until you have corrected the overpayment.

IRS short for Internal Revenue Service is a federal agency responsible for administering and enforcing the Treasury Department's revenue laws, through the assessment and collection of taxes, determination of pension plan qualification, and related activities.

If the excess contribution is not withdrawn by the date your tax return is due - including extensions - you are subject to a 6 percent tax on the amount over your contribution limit.

If you discover the excess contribution before you file your tax return, you won't have to pay the excise tax if you withdraw the contribution and income earned on the excess contribution.

© 2022 VCPOST, All rights reserved. Do not reproduce without permission.


Join the Conversation

Subscribe to VCpost newsletter

Sign up for our Deals of the Day newsletter.
We will not spam you!

Real Time Analytics