COLUMN: Overfunding your IRA can be costly – here’s how to fix it

If you contribute too much money into your IRA, how do you correct the problem without facing a tax penalty? Here are some tips.

Remember the annual limits

The place to start is understanding the annual funding limits. As long as your contributions stay below these amounts you avoid an overfunding problem. The limits for 2024 are:

• $7,000 per individual, and

• $8,000 per individual if age 50 or older

This limit applies to the combination of contributions to both traditional IRAs and Roth IRAs.

What causes excess contributions

Next, understand what typically causes the overfunding problem:

• Combined total IRA problem. This occurs when you have more than one IRA. Remember, the annual limit is a combined total of all IRA accounts (traditional IRA and Roth IRA accounts combined).

• Contributions without income. A contribution can be made only if you have specific types of income, such as W-2 income or self-employment income. Contributions made above your total income amount but below the account limits are still considered excess contributions.

• Whether your spouse is covered by a plan. Your contribution’s tax deduction may be limited if your spouse is also covered by a plan.

Note: Age limits no longer apply. You can now contribute to traditional IRAs at any age. The old rules required you to stop contributions in the year you reach age 70 1/2 or later.

Corrective action and penalty

If you place too much money into your retirement account, you have until the tax filing deadline (including any extensions) to remove the excess contribution or you will be subject to a 6% penalty for each year the excess contribution plus earnings remains in your account.

In addition:

• Traditional IRAs. You will need to account for the additional income on your tax return. If you discover the problem after you file your income tax return, you may need to file an amended tax return.

• Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account are taxable.

Some ideas

What can you do to minimize the risk of excess contributions?

• Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Conduct the math to ensure you will never contribute too much.

• Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Remember, you have until April 15th of the following year to fund your IRA.

• Rollovers are not contributions. Rollovers ARE NOT counted as contributions, so the annual contribution limits do not apply. It is a good idea to seek expert help in this area to ensure your rollover is compliant with the tax code.

One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice. For more information, visit www.fredtfoxiii.com.

Fred T. Fox III is a Lawton native who owns his own business.