If your total IRA contributions (both Traditional and Roth combined) are greater than the allowed amount for the year in your situation, and you have not withdrawn the excess contributions, you must complete Form 5329 to calculate a 6% penalty tax on the excess contribution. This penalty tax will continue to be assessed every year on ALL excess contributions (those from prior years along with any in the current year) until you withdraw the excess contributions.
Avoid this tax by withdrawing any excess amount before the due date. Note that any earnings (interest or other income) on the withdrawn contributions must still be included in gross income.
If you do not withdraw the excess amount, you will pay the penalty again in the following year. However, if you make an IRA contribution which is less than your limit in a given tax year, a portion of the previously made excess contributions will apply toward your contribution limit for that tax year and your total excess contributions for prior years will be reduced by the same amount.
Note that each year you must enter on Line 9 of Form 5329 the amount of excess Traditional IRA contributions from Line 16 of the prior year's Form 5329.
Likewise, each year you must enter on Line 18 of Form 5329 the amount of excess Roth IRA contributions from Line 24 of the prior year Form 5329.
Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:
$5,500 ($6,500 if you are age 50 or older), or
Your taxable compensation for the year.
The taxable compensation limit applies whether your contributions are deductible or nondeductible.
Contributions for the year you reach age 70 1/2 and any later year are also excess contributions.
An excess contribution could be the result of your contribution, your spouse’s contribution, your employer’s contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see Publication 560.
Tax on Excess Contributions
In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year.
The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes, later in Pub. 590.
Excess Contributions Withdrawn by Due Date of Return
You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.
How to treat withdrawn contributions. Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both of the following conditions are met.
No deduction was allowed for the excess contribution.
You withdraw the interest or other income earned on the excess contribution.
You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.
In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3, earlier.
If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discussed later in the publication.
Form 1099-R. You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.
A 6% excise tax applies to any excess contribution to a Roth IRA.
Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:
Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier in Pub. 590 under How Much Can Be Contributed?), plus
Any excess contributions for the preceding year, reduced by the total of:
Any distributions out of your Roth IRAs for the year, plus
Your contribution limit for the year minus your contributions to all your IRAs for the year.
Withdrawal of excess contributions.
For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.
If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.
Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.