If your total IRA contributions (both traditional and Roth combined) are greater than your allowed amount for the year, and you haven't withdrawn the excess contributions, you'll owe a 6% penalty tax on the excess contribution and you must complete Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. This penalty tax will be assessed every year on all excess contributions (including those from prior years) until you withdraw the excess contributions. Avoid paying the penalty tax by withdrawing the excess amount before the due date. Remember: Any earnings (including interest or other income) on the withdrawn contributions should still be included in your gross income.
An excess contribution could be from 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 Chapter 2 starting on page 5 of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Per IRS Publication 590-A Contributions to Individual Retirement Arrangements (IRAs), page 33:
Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:
The taxable compensation limit applies whether your contributions are deductible or nondeductible.
In general, if the excess contributions for a year aren’t withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax.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 can’t 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.
You won’t 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How to treat withdrawn contributions. Don’t 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.
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.
If you timely filed your 2021 tax return without withdrawing a contribution that you made in 2021, you can still have the contribution returned to you within 6 months of the due date of your 2021 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 in Pub. 590-B.
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.
Page 42 (for Roth IRAs):
Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:
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 2021 tax return without withdrawing a contribution that you made in 2021, you can still have the contribution returned to you within 6 months of the due date of your 2021 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 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year.
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