No matter what the reason, contributing beyond the IRS limit could trigger a tax penalty if you don't take steps to handle the excess.
What you can do
There are several ways to correct the mistake, but it's best that you don't wait too long. Here's some help:
If you discover the error before you file your tax return
You can withdraw the excess contributions plus their earnings by your tax-filing deadline—April 15.
- For most types of IRAs, use this form to remove excess contributions
- For SIMPLE IRAs, use this form to remove excess contributions
Did you know?
You have many options to remove an excess contribution from your account. You can:
- Transfer the amount "in kind" to a new or existing (taxable) nonretirement Vanguard Brokerage Account ("VBA").
- Keep your investment in the market by transferring the excess amount to a new or existing nonretirement VBA.
- Open a new VBA—it's fast and easy!
- Move your excess contribution to a taxable account, allowing you to stay in the market. (You don't need to make any trades, and you don't have to meet Vanguard's minimum investment requirement for its proprietary mutual funds.)
Note: If you request to remove your excess contribution through electronic bank transfer (or check), your request may be delayed if funds aren't available in your Vanguard IRA® because the removal may require you to sell shares in one of your positions.
You can withdraw an excess contribution online by completing the appropriate DocuSign form.
If you discover it after you've filed your tax return
You can either:
- Remove the excess within 6 months and file an amended return by October 15—if eligible, the excess plus your earnings can be removed by this date.
- Remove the excess once discovered, even after October 15. You'll need to reduce next year's contributions by the amount of the excess. For example, if your limit is $7,000 and you exceed it by $1,500 in the current year, you can offset the excess by limiting your contributions to $5,500 the following year.
Be awareyou'll have to pay a 6% penalty each year until the excess is absorbed or corrected. You can be charged the penalty tax on any excess amount for up to six years, beginning with the year when you file the federal income tax return for the year the error occurred. Consult a tax advisor to discuss how this applies to you.
Note: If you contributed to a Roth and traditional IRA in the same tax year and your total contribution went over the allowable IRA amount, IRS regulations require you to remove the excess from the Roth IRA first.
You may want to talk with a tax advisor about the best way to handle any excess contributions.
What the penalty could be
The IRS will charge you a 6% penalty tax on the excess amount for each year in which you don't take action to correct the error. You can be charged the penalty tax on any excess amount for up to six years, beginning with the year when you file the federal income tax return for the year the error occurred. Consult a tax advisor to discuss how this applies to you.
For example, if you contributed $1,000 more than you were allowed, you'd owe $60 each year until you correct the mistake.
If you remove your excess contribution plus earnings before either the April 15 or October 15 deadline, the earnings are taxed as ordinary income.
