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March 16, 2021

How do I fix an excess contribution to a Roth IRA, if I made too much money to make the contribution?

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How do I fix an excess contribution to a Roth IRA, if I made too much money to make the contribution?

Question: I made a regular contribution to my Roth IRA and found out afterwards that I am ineligible to make the contribution because my modified adjusted gross income (MAGI) is too high. How can I fix this?

Answer: If an individual makes a regular Roth IRA contribution and is ineligible to make that contribution, that contribution would be an excess contribution. An individual has two options for an excess Roth IRA contribution.

 

  1. Recharacterize the contribution to a traditional IRA. This must be done by the individual’s tax filing due date, including extensions and must be accompanied by any net income attributable (NIA). This option will result in the amount being a traditional IRA contribution.  The individual must have eligible compensation of at least the IRA contribution amount, subject to statutory limits, in order to be eligible for this option.
  2. Distribute the amount as a return of excess contribution. For this option the following applies:
    • If this is done by the individual’s tax filing due date, including extensions, it must be accompanied by any net income attributable (NIA).  The result would be the same as if the contribution was never made to the Roth IRA
    • If this is done after the individual’s tax filing due date, including extensions, it is not accompanied by the NIA, and a 6% excise tax applies for every year it remains in the Roth IRA.

 

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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