Excess IRA Contributions 101
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
In 2010, the IRA contribution limit was the lesser of $5,000 or earned income. If you were 50 or older by the end of 2010 then an additional $1,000 catch-up contribution is allowed, for a total of $6,000.
The same limits also apply to Roth IRAs, but they are not independent of one another. Instead, any amount contributed to a traditional IRA reduces the amount you can contribute to a Roth IRA dollar-for-dollar, and vice-versa. So in short, the total value of all IRA and Roth IRA contributions for 2010 must be below the applicable limit. Any “excess contributions” over that limit are subject to a 6% penalty for each year they remain in the account.
Did you make a Roth IRA contribution and a traditional IRA contribution for 2010? If so, did you accidentally (or maybe not so accidentally) contribute $5,000 to each type of account? There’s still time to avoid the penalty on excess contributions made in 2010. Simply contact your financial advisor or custodian and have the excess contribution, along with any attributable earnings, distributed by October 17, 2011. You should make sure to fill out any necessary paperwork to ensure the distribution is coded as a distribution of excess contributions so that you aren’t responsible for any income tax on it.
Of course, if you catch the mistake now, it’s best to fix the error as soon as possible. If you withdraw a 2010 excess contribution by October 17, 2011, any earnings on the contribution will be subject to income tax (and the 10% penalty if you are under 59 ½) and must be included on your 2010 return – even though the distribution took place in 2011! That means if you already filed your return, an amended return would need to be filed.
Any excess contributions not withdrawn by October 17, 2011 will be subject to the 6% penalty. You can treat any excess contribution from 2010 as a contribution for 2011 if you’re eligible, but the penalty will apply for 2010. If you’re not, be sure to withdraw that excess contribution or it will continue to be subject to the 6% penalty for each year it remains in the account. In a somewhat bizarre twist, if you withdraw an excess contribution after the October 17, 2011 deadline, any attributable earnings or losses remain in the account.
A final word… If you made contributions to both a traditional IRA and a Roth IRA for 2010, the contributions are considered made to the traditional IRA first and then to your Roth IRA, regardless of when during the year you actually made the contributions. So if contributions are made in excess of the applicable limit, they must be withdrawn from the Roth IRA first.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to email@example.com for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at firstname.lastname@example.org or (516) 536-8282 with any questions.