Correcting Excess Contributions to IRAs

Abstract

Taxpayers are generally eligible to make regular annual contributions to their IRAs that are limited to fixed dollar amounts established by statute. The contributions are further limited to the amount of the taxpayer’s taxable compensation. Contributions to IRAs in excess of those limits (excess contributions) are generally subject to a 6 percent excise tax. The 6 percent excise tax may also apply to a failed rollover to a traditional IRA from another traditional IRA or from a qualified retirement plan. A failed Roth conversion from a qualified plan or traditional IRA may be similarly treated. Depending on circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a traditional IRA by using either a corrective distribution, a dollar-limited distribution, an ordinary distribution, absorption, or recharacterization. The techniques for eliminating the excess contribution part of a failed rollover to a traditional IRA are generally the same. However, most of those techniques do not solve the problem of the taxability of the distribution part of a failed rollover. Nevertheless, under certain limited circumstances, a dollar-limited distribution may be particularly useful in eliminating the excess contribution part of a failed rollover to a traditional IRA. In addition, for a few types of failed rollovers, recharacterizations may be particularly effective at both eliminating excess contributions and making the distribution part of the failed rollover nontaxable. Depending on the circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a Roth IRA by using either a corrective distribution, an ordinary distribution, absorption, or recharacterization. The techniques for eliminating the excess contribution part of a failed Roth conversion are generally the same. However, most of those techniques do not change the continuing taxability of the distribution part of a failed Roth conversion. That is where recharacterizations might play a more significant role.