Excess Contributions- A REAL Pain in the Neck

April 12, 2013

You can contribute to both a Traditional IRA and a Roth IRA by April 15th (i.e., tax filing due date), but don't get overzealous... there are some important contribution rules to keep in mind.

Have you ever had a pain in the neck? Not figuratively, but literally... a non-stop, "can't-get-your-mind-off-it" pain in the neck. Well, I have.

It all started when I bent over to pick up something and all of a sudden was overcome with what I suspect a knife stabbing me in my lower back would feel like (since I luckily have not had the personal experience and have to guess what that feels like). I later found out that one of my vertebral discs slipped out of place and was bulging to the point that it was hitting one of my nerves. Sounds fun right? Well, what I didn't know was that several weeks later this would cause constant tightness and soreness in my shoulder and neck area... a literal pain in the neck. From that point on, I have constantly taken precautionary measures in order to avoid this pain in my back and neck in the future.

Excess Contributions- A Pain in YOUR Neck

Similarly, there are several precautionary measures that you and your clients can take that will help you avoid financially-related pains in the neck. A common mistake that occurs this time of year, being tax season and all, is excess contributions to IRAs. These can be a pain in the neck in two ways: 1) The IRS applies a 6% tax per year as long as the excess amounts remain in the IRA, and 2) When removing the excess contributions and any attributable earnings, your client may also face product penalties and/or fees from the service provider. So here is a quick overview of ways your clients can avoid contributing too much to their IRAs for 2012, and some common questions you might face when meeting with your clients.

How to Avoid

The easiest way to avoid excess contributions is quite simple, don't contribute more than you're allowed. Easy enough, right? Well, to do this, you just have to make sure you follow the rules:

Traditional IRA
Roth IRA

Your client can make a deductible contribution if they:

  • Have earned Income


  • Did not attain age 70 ½ in the year of contribution


  • Meet income limits requirements (see Publication 590)*


  • Follow the 2012 maximum contribution limits, which, in aggregate are the lessor of 100% of earned income or $5,000 ($6,000 if age 50 and older)**


Your client can make a contribution  if they:


  • Have earned Income


  • Meet income limits requirements (see Publication 590)*


  • Follow the 2012 maximum contribution, which, in aggregate are the lessor of 100% of earned income or $5,000 ($6,000 if age 50 and older)**

*An individual can still make a non-deductible contribution to a Traditional IRA if they do not meet the stated income limits requirements.

**If your client is otherwise eligible to contribute to a Roth IRA and Traditional IRA, they can contribute to both as long as the aggregate contributions do not exceed the applicable tax year contribution limits.


Common Questions:

Below, you'll find some common questions that might come up if you're ever working with a client that has made an excess contribution.

Common Questions


What is an "excess contribution?"

A contribution that is more than the smaller of:

  • The contribution limits in the given tax year, or
  • Your taxable compensation for the year

What are the ramifications of not removing excess contributions?

The taxpayer must pay an additional 6% tax each year on excess amounts that remain in the IRA at the end of the tax year.

What needs to be done to remedy an excess contribution if the error was found BEFORE tax filing due date (plus extensions)?

The excess contributions and any earnings attributable to the contributions must be removed by the tax filing due date (including extensions) in order to avoid the additional 6% tax.

What needs to be done to remedy an excess contribution if the error was found AFTER tax filing due date (plus extensions)?

There are generally two options when addressing excess contributions AFTER the tax filing due date (plus extensions):

  • Option 1: Remove the excess contribution
  • Option 2: Report the contribution to a future tax year (assuming the maximum allowable contribution has not been made for the future tax year already). You cannot report the contribution to an earlier year.

Note: the 6% tax will still apply to the excess contributions that remained in the IRA after the tax filing due date (plus extensions)

What other issues should my client be aware of concerning the distribution of excess contributions?

There are two main issues to be aware of when removing the excess contributions:

  1. Any interest distributed will be taxable and may be subject to the additional 10% federal tax penalty if under age 59 ½; and
  2. Product surrender charges and/or fees may also apply to the distribution.

These rules apply to both Roth IRAs and Traditional IRAs

In the end, the best remedy to excess contributions is to avoid them entirely, but at least now you'll have some information at your fingertips to help your clients with this financial pain in the neck.

Picture of Chad Goforth

Chad is currently an Attorney Consultant for the Corporate Law Department at Pacific Life. Previously, he was a Senior Retirement Strategies Consultant, bringing more than 13 years of industry experience to his role and providing technical insights to our sales team and registered representatives on a variety of issues including IRAs, qualified plans, annuities, and estate planning issues.

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