Tax on Excess IRA Contribution

July 28th, 2009

What is the IRA tax on the withdrawn Excess IRA Contribution?

A. IRA Tax on Excess IRA Contribution withdrawn before the deadline:

The Excess IRA Contribution withdrawn before the deadline will not be included in income provided that no deduction was taken for the IRA contribution and any positive income on the Excess IRA Contribution is also withdrawn.

(Note: Adjusting the Excess IRA Contribution for account depreciation is permitted).

The earnings, if any, are included in gross income in the year in which the IRA contribution was made, regardless of when the corrective IRA distribution occurs. The earnings are also subject to an additional 10% tax on early IRA distributions, unless an IRA early withdrawl penalty exception applies.

B. IRA Tax on Excess contribution withdrawn after the deadline:

The Excess IRA Contribution withdrawn after the deadline will be included in income if one of the following applies:

1. The total IRA contribution for the year the Excess IRA Contribution was made was in excess of the maximum allowable IRA contribution for the year (for 2006: $4,000 or $5000 if 50 years and older, and or

2. The Excess IRA Contribution represents an amount that was erroneously rolled over from a qualified plan, unless it was based on inaccurate information provided by the individual’s employer.

Any IRA contribution withdrawn after the deadline will be subject to a 6% excise IRA penalty tax annually.

If the Excess IRA Contribution was a result of a SEP IRA or SAR SEP IRA contribution, substitute the SEP IRA or SAR SEP IRA annual contribution limit in B(1) above to determine the maximum allowable IRA contribution.

Traditional IRA