Overcontributed to an IRA? Here’s what to do.
Putting too much into an IRA is a common mistake, and, given the tax rules involved, it’s not something you should handle on your own. The good news is that Fidelity offers several ways to correct an excess and help get you back on track. Here’s what to know.
What counts as an excess contribution?
An excess contribution just means you put more into your IRA than the IRS allows, either by going over the annual limit or contributing to a Roth you weren’t eligible for.
Why do overcontributions happen?
- Traditional and Roth IRAs share one limit: If you contribute to both (or at more than one firm), it’s easy to go over.
- Roth IRA eligibility depends on income: If your income is higher than expected, there’s a chance you may no longer qualify for a Roth contribution you already made.
What are your options if you overcontribute?
1. Return of excess (most common)
What it is: Removes the extra contribution, plus or minus any earnings.
Why choose this: You’re ahead of the tax filing deadline and want the cleanest fix that avoids the 6% penalty.
How to do it: Log in and request a return of excess contribution. Fidelity will calculate the earnings and losses for you.
2. Recharacterization
What it is: Changes a Roth contribution into a traditional contribution (or vice versa).
Why choose this: You contribute to a Roth, then learn your income is too high and prefer to keep the money in an IRA rather than pull it out.
How to do it: Log in and submit a recharacterization request before the tax-filing deadline (plus extensions). Note: In some cases, this step may be used in a backdoor Roth conversion.
3. Apply the excess to next year (less common)
What it is: Leaves the contribution in your IRA and counts it toward next year’s limit.
Why choose this: You’ve missed the deadline for #1 or #2, or you prefer fewer steps even though you’ll owe a 6% penalty this year.
How to do it: Report the excess on your taxes and apply it to next year’s limit. Work with a tax advisor to make sure this option is right for you.
Have you ever had to fix an IRA overcontribution? Share your experience or tips below.