Excess Contributions Penalty
A taxpayer who contributes more to a Roth IRA than the year’s contribution limit is subject to a 6% excise tax (Form 5329 penalty) on the excess amount. Excess contribution to a Roth IRA for a year is the sum of:
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That year’s contributions (other than rollover contributions) that are more than the contribution limit for the year, plus
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Any excess contributions for the preceding year, reduced by the total of:
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Any distributions out of the Roth IRA for the year, plus
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The contribution limit for the year minus the total of all IRA contributions for the year.
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Under this formula, excess contributions are reduced as a deemed Roth IRA contribution for each subsequent taxable year to the extent the Roth IRA owner does not actually make a regular IRA contribution in those years (Reg. § 1.408A-3, Q&A-7).
Exceptions to the Penalty
If the excess contributions, plus any earnings, are withdrawn on or before the extended due date of the return, the excess contributions penalty won’t apply. The earnings are treated as earned and received in the year the excess contribution was made. Another way to avoid the 6% penalty is to apply the excess contribution to a later year’s contribution, provided the contributions for that later year are less than the maximum allowed for that year.