Excess Contributions

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, New York
• Pages: 23-31

23

EXCESS

CONTRIBUTIONS*2

1. The IRS has found that many taxpayers contribute more to a tra-

ditional IR A than is permitted under the Internal Revenue Code.

2. A contribution to a traditional I RA in excess of legal li mitations

is called an “excess contribution.” An excess contr ibution is gen-

erally subject to a 6 percent excise tax under IRC §4973 on the

excess amount that remains in a traditional IR A at the end of

each year. A special IRS rule, however, applies to the first year

that the excess contribution is made. This special IRS rule is dis-

cussed below.

Author’s Note

This 6 percent excise tax on an excess contribution is hereinafter referred

to as a penalty or penalt y tax. The 6 percent penalty tax, however, may

not exceed 6 percent of the value of the traditional IRA account deter-

mined as of the close of the taxable year. This 6 percent penalty tax also

applies to excess contributions made to a Roth IR A.

3. An excess contribution can be triggered as a result of an error i n

not understanding the IRS rules. For example, an excess contri-

bution takes place if a tax payer attains age 70½ in a given year

and erroneously makes a contribution to a t raditional IRA. This

contribution to a traditional IRA is not permitted under law in

that year or in any subsequent year. Another example of an excess

contribution is an improper rollover contribution of a requi red

minimum distribution.

* The material in this sec tion has been adapted in pa rt fromThe IRA Distribution

Rules:IR S Compliance and Audit Is sues(Product #PTX1202D), published by t he Ameri-

can Inst itute of CPAs. Available at w ww.CPA2biz.com. Copyright 2012, Sey mour

Goldberg. All right s reserved.

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