Traditional IRA

Archive for June, 2009

What are the IRA penalties tax on an Excess IRA Contribution?

In general, if the Excess IRA Contribution for a year and any net income attributable to it are not withdrawn by the deadline , the Excess IRA Contribution is subject to a 6% excise IRA penalty tax. 

The 6% excise IRA penalty tax must be paid each year on Excess IRA Contribution amounts that remain in the IRA account at end of the tax year. 

The 6% excise IRA penalty tax is reported and paid with IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. 

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Does the 6% excise IRA penalty tax apply to excess IRA contributions withdrawn by the deadline?

No. 

The 6% excise IRA penalty tax does not apply if the taxpayer withdraws the Excess IRA Contribution and the net income attributable (either positive or negative) to the Excess IRA Contribution by the deadline. 

The withdrawn Excess IRA Contribution amount is not taxed if a deduction is not taken for the IRA contribution and the net income attributable to the Excess IRA Contribution is also withdrawn. 

The net income (if positive) is included in gross income in the year withdrawn and may also be subject to the additional 10% premature IRA distribution penalty unless an IRA early withdrawal exception applies. 

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What happens if the Excess IRA Contribution is not withdrawn by the deadline?

If an Excess IRA Contribution is not removed by the deadline, a 6% excise tax is due on the Excess IRA Contribution. 

The excise tax will continue to apply annually until the Excess IRA Contribution is removed. 

If the individual chooses to remove the Excess IRA Contribution after the deadline, earnings on that excess need not be removed. 

Alternatively, the individual may treat the Excess IRA Contribution as an IRA contribution for the following year.