Oops. An IRA Contribution Error 

In a recent review of IRS practices, The Treasury Inspector General of Tax Administration (TIGTA) released a new report on the problem of excess contributions into IRA accounts. The report recommends better taxpayer education and:

“Identifying a more complete and accurate universe of individuals who potentially made excess contributions from which to select potentially productive cases.”

“Potentially productive cases” means selection for an IRS audit. Given this renewed focus on the problem of contributing too much into IRAs, here is what you need to know...

 Remember the annual limits

2015 Annual IRA contribution limits

  • $5,500 per individual
  • $6,500 per individual if age 50 or older ($1,000 catch up provision)

This limit applies to the combination of contributions to both Traditional IRAs and Roth IRAs. Also remember there are income limits to participation. They are:

IRA Single;
Head of household		 Married
filing joint		 Married
filing separate
Traditional IRA $61,000 - 71,000
Non-participating spouse:
$183,000 – 193,000
Participating spouse:
$98,000 – 118,000
$0 – 10,000
Roth IRA $116,000 – 131,000 $183,000 – 193,000 $0 – 10,000

Note: The participation comment relates to whether you or your spouse are participating in a qualified retirement plan through your employer.

What causes excess contributions

Excess contributions can be caused by:

  1. Contribution over the annual limits (Traditional IRA and Roth IRA combined)
  2. Contribution without income (A contribution can only be made if you have income. Contributions made above your income but below the account limits are still considered excess contributions.)
  3. Traditional IRA contributions and age 70 1/2. Remember you may no longer contribute to Traditional IRAs in the year you reach age 70 1/2 or later. These contributions are also deemed excess contributions.

Corrective action and penalty

If you place too much money into your retirement account you have until the tax filing deadline including any extensions to remove the excess contribution. Any excess amount will be subject to a 6% penalty for each year the excess contribution remains in your account. You may also owe tax on contributions and earnings created by the excess contribution.

In addition:

Traditional IRAs. You will need to account for the additional income on your tax return. So if you discover the problem after you file your income tax return, you may need to file an amended tax return.

Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account is taxable.

Some ideas

What can you do to minimize the risk of excess contributions?

Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Your withdrawal could be made at the beginning or end of each month or each quarter. Conduct the math to ensure you will never contribute too much.

Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Want to wait for your refund? Remember you have until April 15th of the following year to fund your IRA. Consider taking advantage of this additional time.

Rollovers are not contributions. Remember rollovers ARE NOT contributions so the annual contribution limits do not apply. If you wish to roll funds from a qualified plan into your IRA, the excess contribution limits will not impact you as long as the rollover is handled correctly. It is a good idea to seek expert help in this area to ensure your rollover is compliant with tax code. For instance, there are usually tax obligations if the rollover is into a Roth IRA.

Please give us a call to discuss this or any of our other topics with you, so we can address your specific requirements.

DiSabatino CPA
Michael DiSabatino
651 Via Alondra Suite 715
Camarillo, CA 93012
Phone: 805-389-7300
ww.sharpcpa.com

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