Excess IRA Contributions

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., Woodbury, New York
• Pages: 116-121

116

EXCESS IRA

CONTRIBUTIONS

introduCtion

If an excess contribution is made to an IRA, it generally will trigger a 6%

excise tax. This section will explain how this IRS penalty may be avoided.

exCise tax

In the event that an excess contribution is made to an IRA, then the ex-

cess contribution is subject to a 6% excise tax for each taxable year that

the excess contribution exists.

Section 4973(a) of the Code provides that there is imposed for each

taxable year a tax in an amount equal to 6% of the amount of the excess

contributions to the individual’s accounts or annuities (determined as of

the close of the taxable year). The amount of tax for any taxable year may

not exceed 6% of the value of the account or annuity determined as of

the close of the taxable year.

An excess contribution in the case of a traditional IRA is the amount

contributed to the IRA for the taxable year that exceeds the amount al-

lowable as a deduction for the contribution to the IRA. A Roth IRA is

subject to the excess contribution rules as well.

Excess contributions to an IRA may occur in many ways and should

be avoided since the IRS penalties are triggered for each year that the

excess contribution continues.

Improper rollovers by the IRA owner or the surviving spouse can

trigger an excess contribution. If an excess contribution is made to an

IRA, then prompt action must be taken to avoid or reduce the 6% excise

tax on the excess contribution.

The advisor must be aware of the definition of an excess contribu-

tion and how easy it is to fall into a trap that triggers a 6% penalty on an

excess contribution.