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Outside the Box: I contributed too much to my IRA and Roth IRA — what now?

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Q.: In 2019, I made the mistake of contributing $7,500 to my IRA account. To top it off, in 2020 we both contributed $7,000 dollars to our Roth IRAs, plus $7,000 to our traditional IRA accounts. I now know that’s wrong and am hoping we don’t pay too high a price for our error. I’m 58 years old, and my wife is 56. How do we fix this?

A.:  In both 2019 and 2020, the IRA limit was $6,000 per person. Since both of you were over 50 in both years you could also make a “Catch up” contribution of $1,000 each making your limit $7,000 each. By depositing $7,500, you have made what is known as an excess contribution. Excess contributions are far from rare and since you have caught the problem early, it should not be too costly.

For each tax year, $7,000 per person can go into a traditional IRA, a Roth IRA or a combination of the two as long as the total contributed between those accounts did not exceed $7,000, you have earned income (wages) of $14,000 or more between the two of you, and your joint Modified Adjusted Gross Income (MAGI) was low enough to allow a Roth IRA contribution.

A full $7,000 each could be contributed to a Roth IRA if your MAGI was under $193,000 in 2019.  As income rose from there, only partial contributions were allowed to a Roth IRA. No Roth IRA contribution could be made once MAGI reached $203,000 for married joint filers in 2019. For 2020, the applicable MAGI phase out range was $196,000 to $206,000. If your income prohibited you from contributing to a Roth IRA, you could only contribute to a traditional IRA.

Because you contributed $7,500 in 2019, you made an excess contribution of $500. For 2020, by contributing to both IRAs and Roth IRAs, you made an excess contribution of $7,000 and your wife also made one for $7,000. 

Contact your custodian (the firm holding the accounts). They will have a form for you to fill out and should help you withdraw the excess contribution and the earnings attributable to the excess contributions.  You also need to file Form 5329 with the IRS for 2019.

Your 2019 excess contribution of $500 will be subject to a 6% penalty. That is not a lot, but this penalty is charged every year until corrected so if you do not attend to it, the penalty can grow. In addition, a 10% penalty on any taxable amounts removed from an account will apply because you are under 59-1/2.

Your 2020 overcontributions should be withdrawn soon as well because 6% on a combined excess of $14,000 adds up fast. Fortunately, you can avoid that 6% penalty if you remove the excess, the earnings attributable to the excess and amend your 2020 return before Oct. 15. The 10% penalty on early withdrawal of taxable amounts will still apply.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

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