8.7 Penalty for Excess Contributions to Traditional IRAs

If you contribute more than the allowable amount to a traditional IRA, whether deductible or nondeductible, the excess contribution may be subject to a penalty tax of 6%. The penalty tax is cumulative. That is, unless you correct the excess, you will be subject to another penalty on the excess contribution in the following year. The penalty tax is not deductible. The penalty is figured in Part III of Form 5329, which must be attached to Form 1040.

The 6% penalty may be avoided by withdrawing the excess contribution by the due date for your return, including extensions, plus any income earned on it. The withdrawn excess contribution is not taxable provided no deduction was allowed for it. The withdrawn earnings must be reported as income on your return for the year in which the excess contribution was made. The earnings should be reported to you as a taxable distribution on Form 1099-R. If you are under age 59½ (and not disabled) when you receive the income, the 10% premature withdrawal penalty applies to the income. Similar rules apply to withdrawals of excess employer contributions to a simplified employee pension plan (8.15) made by the due date for your return.

If an excess contribution for 2012 is not withdrawn by the due date (plus extensions) for your 2012 return, but you filed by the due date (with extensions), the IRS allows the withdrawal to be made no later than October 15, 2013 (six months after the regular (unextended) due date of April 17, 2012), provided the related earnings are reported on an amended return that explains the withdrawal; see the Form 5329 instructions for details. If the withdrawal is not made, the 6% penalty will apply to your 2011 return but it may be avoided for 2012 by withdrawing the excess by the end of 2012. Instead of withdrawing the excess contribution during 2012, you may also avoid a penalty for 2012 by reducing your allowable 2012 IRA contribution by the 2011 excess. See IRS Publication 590 and Form 5329 for details.

If you deducted an excess contribution in an earlier year for which total contributions were no more than the maximum deductible amount for that year, you may make a tax-free withdrawal of the excess by filing an amended return by the deadline (47.2) to correct the excess deduction. However, the 6% penalty tax applies for each year that the excess was still in the account at the end of the year.

See IRS Publication 590 for further information on correcting excess contributions made in a prior year.

Roth IRAs.

A similar 6% penalty applies on Form 5329 to excess contributions to a Roth IRA; see Form 5329 and IRS Publication 590 for further details.