If you save for retirement in a ROTH IRA (Individual Retirement Account) you may find you have over contributed. It may seem smart saving more, but the IRS imposes a limit along with fees for going over the limit. You owe penalties for each year the account is in excess, which is commonly six percent.

Contributions that exceed the limit happen for number of reasons, such as  a change in income or forgetting contributions you have already made. There's no need to panic. Here are tips to remove excess ROTH IRA contributions. 

Calculate What you Should Have Contributed

You usually have six months after filing taxes to correct an error. Figure your AGI (Adjusted Gross Income) for the year you made the excess contribution. Deduct income from conversions and rollovers .Include applicable deductions, such as student loans. 

Consider how your marital status could effect you filing, such as filing jointly. Get the maximum contribution amount along with the total interest from the IRS or an accountant for your situation. 

Deduct this amount from what you actually paid. For example, if your contribution is $3,000 and the limit is $2,000, subtract $2,000 from $3,000 to get an excess of $1,000.

Withdraw or Recharacterize the Access

One way to handle the excess is by recharacterizing the contribution. This means you convert the money to a traditional IRA. Contact your brokerage firm to handle the transferal. The transfer will cancel out the ROTH contribution.

If you don't qualify for a conversion, you can withdraw the excess. You commonly don't qualify for traditional IRA contributions if you have reached retirement age or contributed the same excess amount to two brokerage firms.

To withdraw the excess, do so before or on the date to file taxes. It will not count as a contribution. Be aware this could count as taxable income.

Amend your tax return for that year with the corrected amount. On top of the return, write "Filed Pursuant to Section 301.9100-2".

Roll the Excess to Future Years

If you caught the error six months or longer after you filed, roll the excess over to a year in the future. You still may be required to pay the penalty.

Carry the difference in the limit and excess over. For example, if you have an excess of $2,000, and the limit is $1500, roll $500 over to the next year. Your penalty would be $30-$50 when you apply the six to ten percent. 

Keep up with any contributions you make. If you need further help planning for retirement, or advice on financial matters, contact a financial planning service.

Share