General rule:

  • Timely correction: You have up to the due date (including extensions) to withdraw excess contribution plus earnings. After filing your return, you can still withdraw within 6 months “pursuant to section 301.9100-2”.
  • Distribution - special rule (“Dollar Limited distribution”).
  • Absorption.
  • Regular distribution.
  • Recharacterization.
  • 6% penalty on excess for untimely correction for every year before the year the excess is removed.
  • 6% excise tax does not apply to earnings.
  • 10% early distribution penalty before 59½ has been eliminated for timely corrective distributions made on or after December 29, 2022 per SECURE Act 2.0. This includes both excess contribution and its earnings1.
  • The earnings from timely correction are subject to tax as ordinary income “for the year in which the excess contribution was made.”2.
  • Earnings from excess contribution do not need to be withdrawn for untimely correction. “If the taxpayer nevertheless distributes the accumulated income the IRA earned on the excess contribution, the distributed income is subject to tax and is subject to the early-distribution penalty (if no exception applies) (IRS Letter Rulings 9633041, 9118020, and 7926152).” based on the Tax Advisor article.

Example 1: Excess contribution to traditional IRA, timely correction.

  • In 2024, Alan had earned income of $3,000, but contributed $7,000 to his traditional IRA which exceeds his earned income limit, so there is an excess contribution of $4,000 which generated $500 earnings.
  • In 2025, before the filing deadline (including extensions) he withdraws $4,000 excess contribution plus the $500 earnings as required for timely correction.
  • In 2026, he will receive a 1099-R with a code P and $500 taxable income. He should have reported the income in advance on 2025 return using 1099-R code 8 or amend it afterwards.
  • He will pay regular tax on the $500 earnings, and that is all. If he has deducted the excess contribution, he should amend the return to remove the deduction.

Example 2: Excess contribution to traditional IRA, untimely correction - special rule, when the total contribution is not more than the maximum amount3.

  • In 2024, Bob had earned income of $3,000, but contributed $7,000 to his traditional IRA which exceeds his earned income limit, so there is an excess contribution of $4,000 which generated $500 earnings.
  • In 2025 before the filing deadline, he did not find the error and contributed the maximum amount to the IRA.
  • On April 1, 2026, before filing his 2025 tax return, he found the error. He needs to withdraw only the $4,000 excess contribution (not the earnings).
  • He must pay 6% excise tax on the $4,000 excess for 2024 and 2025 (two years).
  • He must pay 10% early distribution penalty on the excess contribution.
  • He does not pay regular tax on the excess contribution because it was never deducted.
  • If he has deducted the excess contribution, he should file an amended return to remove it and pay tax for that year.

Example 3: Excess contribution to traditional IRA, untimely correction - absorption.

  • In 2024, Charlie had earned income of $3,000, but contributed $7,000 to his traditional IRA which exceeds his earned income limit, so there is an excess contribution of $4,000 which generated $500 earnings.
  • In 2025, he was able to contribute $7,500 but he contributed $3,500 instead, absorbing the $4,000 excess contribution from 2024.
  • He must pay 6% excise tax on the $4,000 excess for 2024 only.
  • There is no need to distribute earnings, but if you do, you will pay tax and early distribution penalty on it.

Example 4: Excess contribution to traditional IRA, untimely correction - regular distribution.

  • In 2024, David had earned income of $3,000, but contributed $83,000 to his traditional IRA which exceeds his earned income by $80,000 which is excess contribution. His account balance is $420,000, most of which is due to his prior deductible contributions and earnings.
  • In 2025, he did not find the error, so he missed timely correction; the special rule does not apply as the total contribution exceeds the statutory limit; he cannot use the absorption method as he retired and does not have earned income.
  • His only option is regular distribution, but IRC Sec. 4973(b)(2)(A) stipulates that only the distribution included in the gross income can reduce the excess.
  • He should make a minimal distribution where the taxable portion equals the excess. Let d be the optimum distribution, e the excess contribution, b the balance of the traditional IRA, and i the investment in the traditional IRA, per the IRS pro-rata rule, we want \(d - d * \frac{i}{b} = e\), which gives \(d = \frac{eb}{b-i}\).
  • In this case, the distribution is $98,824 where $18,824 is the return of investment (basis), and $80,000 are the earnings used to reduce the $80,000 excess.
  • If there are not enough earnings to fully reduce the excess contribution to zero, you should distribute the entire account balance. Since 6% excise tax is on the lesser of the excess or the account balance (“The amount of such tax for any taxable year shall not exceed 6 percent of the value of the account or annuity (determined as of the close of the taxable year).” per IRC Sec. 4973(a)), there is no tax to be paid. The excess amount in the account is technically removed, because Form 5329 instructions (line 9) provide that the excess contribution amount gets carried forward only if the 6% excise tax is more than zero.

Example 5: Excess contribution to traditional IRA, untimely correction - recharacterization.

  • In 2024, Edwards contributed $7,000 to his traditional IRA. He has earned income of $5,000, so he has an excess contribution of $2,000.
  • Recharacterization cannot be used to reduce excess contributions. If Edwards recharacterizes the contribution to Roth IRA, he would still have an excess contribution in the Roth IRA.
  • The excess contribution must be corrected through distribution or absorption as discussed above.

Example 6: Excess contribution to Roth IRA, timely correction.

  • In 2024, Frank contributed $7,000 to Roth IRA, all of which is an excess due to income limit.
  • In 2025 before the filing deadline (including extensions), he withdraws $7,000 plus earnings $200 before the filing deadline.
  • In 2026, he will receive a 1099-R with a code P and $200 taxable income. He should have reported the income in advance on 2025 return using 1099-R code 8 or amend it afterwards.

Example 7: Excess contribution to Roth IRA, untimely correction - special rule, when the total contribution is not more than the maximum amount3.

“Dollar-limited distributions are not available for excess contributions to Roth IRAs.” per the Tax Advisor Article.

Example 8: Excess contribution to Roth IRA, untimely correction - absorption.

  • In 2024, George had a modified adjusted gross income (MAGI) of $161,000 which completely phases out his allowed Roth IRA contribution, but contributed $7,000 to his Roth IRA. The entire $7,000 is an excess contribution that generated $500 earnings.
  • In 2025, he did not make a timely correction before the filing deadline (including extensions), but his income falls below $152,000, and he did not make any IRA contributions, which allows him to fully absorb the 2024 excess contribution.
  • He must pay 6% excise tax on the $7,000 excess for 2024 only.
  • He does not pay regular tax nor 10% early distribution penalty as nothing is distributed.
  • The IRS does not require you to withdraw the earnings to reduce the excess, so the earnings from an excess contribution that has been absorbed are treated the same as any other Roth IRA earnings which follow the Roth IRA distribution rule.

Example 9: Excess contribution to Roth IRA, untimely correction - regular distribution.

  • In 2024, George had a modified adjusted gross income (MAGI) more than $161,000 which completely phases out his allowed Roth IRA contribution, but contributed $7,000 to his Roth IRA. The entire $7,000 is an excess contribution that generated $500 earnings.
  • In 2025, he had an MAGI more than $167,000, but he contributed $7,000 as well, which is again an excess contribution.
  • In 2026, he read this post and realized this is not allowed. As he missed timely correction; there is no special rule for Roth IRA as for traditional IRA; he cannot use the absorption method as his income will exceed the threshold to phase out the Roth IRA entirely for foreseeable years.
  • His only option is regular distribution. Fortunately unlike the case in traditional IRA where only the taxable income reduces the excess, the entire distribution can be used to eliminate the excess, so he distributed $14,000 on January 1 before the 2025 filing deadline.
  • He must pay 6% excise tax on $7,000 on 2024 tax return as this is the amount of excess contribution that remained on the account at the end of 2024.
  • He must pay 6% excise tax on $14,000 on 2025 tax return as both years’ excess remained on the account at the end of 2025.
  • He pays no regular tax on the $14,000 as this is a withdrawal from the basis per the Roth IRA distribution rule.
  • The law does not require him to withdraw the earnings, but if he chooses to, it follows the regular Roth IRA distribution rule.

Example 10: Excess contribution to Roth IRA, untimely correction - recharacterization.

  • In 2024, Harry had a modified adjusted gross income (MAGI) of $161,000 which completely phases out his allowed Roth IRA contribution, but contributed $7,000 to his Roth IRA. The entire $7,000 is an excess contribution that generated $500 earnings.
  • In 2025, he found the error, and recharacterized the contribution as one to traditional IRA. The contribution is always allowed, but the deduction depends on the income limit.
  • A few days later, he can convert the traditional IRA contribution to Roth IRA, a method commonly called backdoor Roth conversion.

Footnotes:

1 Both Publication 590-A and Publication 590-B say “Beginning on or after December 29, 2022, the 10% additional tax will not apply to your withdrawal of interest or other income, if withdrawn on or before the due date (including extensions) of the income tax return.” The legislation indicates that the elimination of the additional tax on corrective distributions applies to any tax liabilities determined after the law has been enacted, even if the excess contribution (the “act” or “failure to act”) happened before the law was passed.

2 If you made an excess contribution in 2023 before the tax due date, even if that contribution was allocated to the 2022 tax year, any earnings from that excess contribution would be reported on your 2023 tax return. The language in IRC 408(d)(4)

In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.

indicates that the income should be reported in the year when it was actually earned, which is the year when the excess contribution happened.

3 IRS Publication 590-A (2024) based on IRC Section 408(d)(5)(A) states:

In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

  • Total contributions (other than rollover contributions) for 2024 to your IRA weren’t more than $7,000 ($8,000 if you are age 50 or older).
  • You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.

Excess contribution deducted in an earlier year. If you deducted an excess contribution in an earlier year for which the total contributions weren’t more than the maximum deductible amount for that year (see the following table), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040-X for that year and don’t deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, whichever is later.

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