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RETIREMENT
SEPTEMBER 27, 2021

What happens if I go over my IRA contribution limit?

Answered by
Debra Greenberg
Director, Retirement & Personal Wealth Solutions, Bank of America
If you contribute more than the traditional IRA or Roth IRA contribution limit, the tax laws impose a 6% excise tax per year on the excess amount for each year it remains in the IRA. Generally, for 2021, the annual contribution limit is a maximum of $6,000, or $7,000 if you're 50 or older at any time during the calendar year; however, for Roth IRA contributions, your modified adjusted gross income (MAGI) may reduce or eliminate this limit. To find out more, read Merrill's Contribution Limits and Tax Reference Guide (PDF).
The IRS imposes a 6% tax penalty on the excess amount for each year it remains in the IRA.
Going over the limit is definitely something to watch out for because it can happen easily enough; perhaps you simply miscalculate, or your contributions to a Roth IRA become ineligible because your MAGI for the year has exceeded the tax law limits. For 2021, your contributions to a Roth IRA will be phased out if your MAGI is at least $125,000 but less than $140,000 for singles or at least $198,000 but less than $208,000 for married couples filing jointly. For 2021, you will not be eligible to contribute to a Roth IRA if your MAGI is $140,000 or more for singles or $208,000 or more for married couples filing jointly.
It's especially easy for you to go over the limit if you are funding both a traditional and a Roth IRA.

What can I do if I've exceeded my IRA contribution limit?

There's no need to panic. Here's some tips if you've accidentally overfunded an IRA.
#1 You discover you've contributed too much before timely filing your tax return (including extensions).
  • Withdraw the excess contribution and any income it has earned to avoid the 6% excise tax. You won't owe additional federal income tax on the excess contribution you've taken out, but you may owe federal income tax on the earnings and an additional 10% federal tax on the earnings if you are under age 59½. State taxes may also apply. Note that if you're funding both a traditional and Roth IRA, the IRS requires that you remove excess contributions from the Roth IRA first.
#2 You discover you've contributed too much after timely filing your tax return, but within six months after your initial tax return filing deadline (without extensions).
  • Withdraw the excess contribution and earnings on that contribution and file an amended tax return by October 15 to avoid the 6% excise tax. The earnings portion of the distribution will be subject to taxes as described above.
#3 You discover you've contributed too much after the October 15 deadline.
  • Generally, you can carry the excess contributions forward as an IRA or Roth IRA contribution for that subsequent year. Just remember to reduce your contribution by the carry-forward amount that year, or you might end up exceeding the limit again. Note, however, that while the carry forward approach allows you to avoid the 6% excise tax on the excess amount in subsequent years — you still will incur the excise tax for the year of contribution.
Note that other correction methods also may be available depending on your specific facts and circumstances.
This can get complicated. In order to determine which approach suits your situation, consult with your tax advisor before making any moves as there may be forms you will have to file with the IRS when you are reconciling.
Ready to get started?
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information on rolling over your IRA, 401(k), 403(b) or SEP IRA, visit our rollover page or call a Merrill rollover specialist at 888.637.3343.
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