- How an overcontribution occurs
- Contribution limits
- Correcting an overcontribution
How to calculate net income attributable
How an overcontribution occurs
An over contribution may occur for a variety of the following reasons:
- Contribution exceeds the annual contribution limit for your age
- Contribution exceeds your earned income
- Contribution made on behalf of an individual after date of death
- Required minimum distribution (RMD) is rolled over
- Depositing an ineligible rollover contribution
Contribution to a Roth IRA and your modified adjusted gross income (MAGI) exceeded the income limit enforced by the IRS
The 2022 and 2023 contribution limits for Traditional and Roth IRAs are as follows:
|Contribution Year||Age/Contribution limit|
Up to age 50: The lesser of $6,500 or your earned income.
Age 50 and older: The lesser of $7,500 or your earned income.
Up to age 50: The lesser of $6,000 or your earned income.
Age 50 and older: The lesser of $7,000 or your earned income.
Keep in mind: total contributions (between all Traditional and Roth IRAs) cannot exceed these contribution limits. For example, if you have a Traditional IRA and a Roth IRA, you cannot exceed the yearly contribution limits (depending on age) between both IRAs.
Contributions for SEP IRAs each year cannot exceed the lesser of 25% of your compensation, or $61,000 for 2022 and $66,000 for 2023.
Correcting an overcontribution
If an overcontribution occurs, there are multiple ways to correct it. Failing to correct an overcontribution may result in penalties – you may owe the IRS 6% excise tax for every year the excess remains in the IRA. Additionally, you may not deduct the excess amount when filing your taxes. While we cannot advise on which correction is best for you, we have listed the options to that are available at M1.
Remove the overcontribution plus all earnings attributable to the overcontribution before the tax deadline.
The excess or unwanted IRA contribution amount, plus the net gain or loss, will need to be removed by the tax filing deadline, including an automatic six-month extension. If you remove the excess in a timely manner, you will not owe tax on the overcontribution amount. You will owe tax and, on any earnings, and may owe the IRA 10% additional penalty if you are under the age of 59½ on the earnings as well.
To withdraw the overcontributed funds, plus the net gain or loss, from your M1 account:
- Using the Home tab, select “Move Money”. Then select “One-Time Cash Transfer”.
- Enter the overcontribution amount and select “Excess Contribution Removal, Before Tax Filing Deadline" as the withdrawal reason.
- Select the Withdrawal Year from the options available.
- Enter the Net Income Attributable (the net gain or loss) to the overcontribution amount.
- For help calculating the Net Income Attributable, a calculator will be available when making the withdrawal.
- Review the transfer information and “Confirm Transfer” to initiate the withdrawal.
If you remove the excess contribution after you file your taxes, you may need to file an amended tax return.
Remove the overcontribution after the tax deadline.
Only the true excess, not a nondeductible contribution, can be removed after the deadline. You may remove only the amount of the excess; no earnings or loss need to be calculated. The excess amount removed may not be taxable if your aggregate contributions for the year do not exceed the annual contribution limit. However, if your aggregate contribution limit for the year exceeded the annual amount, then the excess may be taxable and would be subject to the IRS 10% additional tax if you are under the age of 59½.
To withdraw the overcontributed funds after the tax deadline from your M1 account:
- From the Home tab, select Move Money, then “One-time cash transfer.” Enter the
overcontribution amount and select “Excess Contribution Removal, After Tax Filing
Deadline" as the withdrawal reason
- Review the transfer information and “Confirm Transfer” to initiate the withdrawal
Carry forward method
You can offset the excess contribution by limiting your annual contribution for the following year to the maximum minus the excess, if you qualify to make a contribution. No distribution from your IRA will occur.
For example, if your contribution limit is $6,000 and you exceed it by $2,000, you can offset the excess by limiting your contributions to $4,000 the following year. However, if you use the carry forward method, you are subject to the IRS 6% excise tax because you did not correct the excess by the deadline. You will not be able to recharacterize the carry forward amount to the other type of IRA. For example, if the carry forward amount is in a Traditional IRA, you cannot recharacterize that amount as a Roth IRA contribution.
How to Calculate Net Income Attributable
*Adjusted opening balance is an IRA’s opening balance at the beginning of the period the excess was contributed, including any contributions, transfers, rollovers, or recharacterizations in the IRA since the excess contribution was made.
*Adjusted closing balance is an IRA’s closing balance prior to the removal of the excess, plus any distributions (including rollovers, transfers, and recharacterizations) taken from the IRA during the period the excess was in the account.
Removal of excess plus earnings
Jim, age 42, contributed $7,000 to his IRA in 2022. Jim’s max contribution for 2022 is $6,000 because he is under the age of 50. Jim’s IRA balance before the contribution was $20,000 and is now worth $28,250. Jim has made no additional contributions or distributions. Jim’s Adjusted Closing Balance is $28,250 and his Adjusted Opening Balance is $27,000 ($20,000 + $7,000).
NIA = $1,000 x (($28,250 - $27,000)/$27,000) = $46.30
Jim will remove $1,046.30 ($1,000 in excess contribution + $46.30 earnings attributable to the excess contribution)
Removal of excess minus earnings
Jim, age 42, contributed $7,000 to his IRA in 2022. Jim’s max contribution for 2022 is $6,000 because he is under the age of 50. Jim’s IRA balance before the contribution was $20,000 and is now worth $24,250. Jim has made no additional contributions or distributions. Jim’s Adjusted Closing Balance is $24,250 and his Adjusted Opening Balance is $27,000 ($20,000 + $7,000).
NIA = $1,000 x (($24,250 - $27,000)/$27,000) = -$101.85
Jim will remove $898.15 ($1,000 in excess contribution - $101.85 loss attributable to the excess contribution)
Keep in mind!
- You will want to remove the amount from the IRA where the contribution was made.
- If you made multiple deposits, the last amount is considered the excess.
- If you contributed to both a Traditional and Roth IRA in the same year, the excess is deemed to have occurred in the Roth IRA.
- If you remove the excess contribution after you file your taxes, you may need to file an amended tax return.
If you have further questions, please contact us.
M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.