Help Avoid Trouble: Strategies for Fixing an IRA Overcontribution
June 9,2025
Contributing to an individual retirement account (IRA)—whether it's a traditional IRA or a Roth IRA—is a smart way to build long-term financial security. In fact, simply setting money aside for retirement puts you ahead of many Americans. However, even with the best intentions, it's possible to contribute more than the IRS allows or to contribute when you're not eligible. When that happens, it’s important to act quickly to correct the issue and avoid potential penalties.
Fortunately, if you catch the mistake early, you may be able to fix it without too much hassle. Understanding how excess contributions happen, how to detect them, and what steps you can take to resolve the issue can help keep your retirement savings strategy on track.
Common Ways IRA Overcontributions Happen
There are several ways you might accidentally contribute too much to your IRA:
Exceeding the annual limit: The IRS sets annual contribution limits that apply to the combined total of your traditional and Roth IRAs. If you put money in two accounts, it can be hard to keep track. This is especially true if you use different banks or investment firms. You might accidentally go over the limit.
Earning too much for a Roth IRA: Eligibility to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI). If your income is higher than you expected, you might not be able to contribute to a Roth IRA. This can happen because of a bonus, investment gains, or a side job.
Contributing when you're not eligible: If you don't have enough earned income (or none at all), you may not be eligible to contribute to an IRA. This is common among retirees, students, or individuals taking a break from the workforce.
What Happens if You Overcontribute?
If you put too much money into your IRA, you have until the tax-filing deadline to fix it. This deadline is usually April 15, or October 15 if you file for an extension. You can remove the extra money without penalties if you act in time. However, it's important to understand a few rules:
● Any earnings from the extra contribution must also be withdrawn. These earnings must be reported as income for the year the contribution was made.
● If you don’t fix the mistake by the deadline, the IRS will charge a 6% penalty each year. This penalty applies for every year the extra contribution stays in the account.
Thanks to changes in the SECURE 2.0 Act, you won’t pay the 10% early withdrawal penalty. This applies to any earnings taken out to fix an excess contribution. Just make sure to correct it by the tax-filing deadline.
Three Ways to Fix an Excess IRA Contribution
If you’ve found yourself in this situation, don’t panic. You generally have three ways to correct an excess IRA contribution:
Request a Return of Excess Contributions
This is the most direct method. You’ll need to notify your IRA provider and request that the excess amount—and any earnings—be withdrawn. If your IRA is fully invested, you may need to sell assets to create the necessary cash balance.
At some providers like Fidelity, you need to fill out a specific form. This form is often called an “IRA Return of Excess Contribution Request.” Make sure to collect important details before you start. Note the date of your contribution, the excess amount, and if you have enough cash in your account.
It's wise to consult a tax professional to ensure that your correction is reported accurately on your tax return.
Recharacterize Your Contribution
If you contributed to a Roth IRA but later discovered you weren’t eligible because your income was too high, you might be able to recharacterize the contribution. This means you shift the contribution (plus any earnings) to a traditional IRA instead.
This move can help you stay within the law, but you’ll still be subject to the overall IRA contribution limits. Additionally, you may become eligible for a tax deduction depending on your income and whether you or your spouse is covered by a retirement plan at work.
Recharacterizations can be complicated, especially with tax issues. It’s important to talk to a financial advisor or tax professional before you act.
Apply the Contribution to a Future Year
In some cases, you can carry over the extra amount. You can count it toward next year’s contribution limit. This is only allowed if you're eligible to contribute in the next tax year. Keep in mind, however, that this method does not avoid the 6% excise tax for the year in which the excess occurred.
For example, if you contributed $1,000 too much in 2024 and want to apply it to 2025’s limit, you’ll still owe the 6% penalty on the excess $1,000 for 2024. Be sure to verify that the carryover amount will qualify in the next tax year based on your expected income and contribution limits.
Final Thought
Contributing to an IRA is a valuable step in your retirement planning journey, but mistakes can happen. Fortunately, the IRS provides several ways to correct an overcontribution—especially if you act quickly.
If you think you may have gone over your limit or made an ineligible contribution, don’t wait. Review your accounts, consult a professional, and take the necessary steps to stay on course. A qualified financial advisor can help you navigate these situations with confidence and ensure your retirement strategy remains sound.
Sources:
https://www.fidelity.com/learning-center/smart-money/overcontribute-to-an-ira
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.