How to calculate and fix excess Roth IRA contributions
The Roth IRA excess contributions can be fixed and you have a few options on how to do it. The three options for fixing the excess contributions are removing the excess contributions, moving them to the following year, or transferring (recharacterizing) the excess to a traditional IRA.
Three Methods to fix Roth IRA Excess Contributions
- Remove excess contributions to a non-retirement account (a regular brokerage or investment account).
- Absorb (move) the contributions to the following year.
- Recharacterize the excess to a traditional IRA.
If you made multiple contributions, the last amount contributed is considered the excess contribution. If you contribute to both a Traditional IRA and Roth IRA for the same tax year, the excess is considered to have occurred in the Roth IRA first.
If you file your taxes on time without withdrawing the excess contributions, you can still fix it within 6 months of the due date of your tax return, even without filing an extension. However, if you do not fix it by the April filing deadline, you can't use the recharacterization method and move the money to the IRA as a nondeductible contribution.
6% Penalty (excise tax) and AVOIDANCE
Each year that you do not fix the excess contributions, you will be subject to a 6% excise tax on the excess contribution until you fix it or the contributions have been absorbed.
Pro Tip: If you fix your excess contributions before your tax filing deadline including extensions, you will not be subject to the 6% penalty. You DO NOT need to file an extension to qualify for this deadline, which is usually October 15th.
The excess contributions are absorbed if the following year's amount you qualify to contribute is equal to or greater than the amount of your excess contribution. However, you will still pay the 6% penalty in the first year for this scenario.
For example, if you over contributed $6,000 to your Roth IRA this year but you qualified to make the full $6,000 contribution next year, that $6,000 would count as the contribution. You would still have to pay the 6% penalty for the year the excess contribution was not fixed.
In some instances, this may be the most desirable outcome. Fixing an excess contribution might be more work than it's worth. In the above example, the penalty on the excess amount is $6,000 x 6% = $360.
If the amount is not absorbed, the 6% penalty will continue each year until you fix the excess contribution.
How to calculate your Roth IRA contribution limit
Use the following worksheet to calculate your Roth IRA contribution limit. If you are between the income phaseout amounts listed under the Roth IRA Income Limits, this worksheet will help you calculate your reduced amount.
The Roth IRA Income Limits are below this worksheet.
Roth IRA Income Limits
|Filing Status||2021 Roth IRA Income Range||2022 Roth IRA Income Range|
|Married Filing Jointly||$196,000-$208,000||$204,000-$214,000|
|Married Filing Separately||$0-$10,000||$0-$10,000|
Method #1 - Remove Roth IRA Excess Contributions
Download the Roth IRA excess contributions worksheet.
Download the worksheet above. You can watch the video or use the following guide to complete the removal of excess contributions worksheet.
Net Income Attributable Formula
The formula below is used to calculate the net income attributable (the gains associated with your contribution) to a returned or recharacterized IRA contribution. The steps below will use a worksheet to help guide you through the calculation so you don't have to do the math.
Pro Tip: There are two parts to the amount being removed or recharacterized, the excess contribution and the net income attributable. They are not the same. The Excess contribution is the amount you overcontributed and the net income attributable is the amount of gains associated with the excess contribution.
1. Enter the balance as of the date of withdrawal.
This is the balance today or when you're going to withdraw the funds from the Roth IRA. If it's not done today, then you can't complete this worksheet. Complete it right before you want to remove the excess contributions.
Pro Tip: Do this worksheet on a Friday after the market closes so you have the weekend to get the math done and submitted Monday morning for removal. The numbers won't change over the weekend so it gives you time to check and get it done correctly.
Usually, you can get your account balance through your broker-dealer or online trading portal.
2. Add the amount of any withdrawals (including transfers out of the account) taken after the excess contribution and before the excess removal.
You can find your withdrawals in the transaction history on your account statements or online portal. If you run a sort on your transaction history, you may see something like this and will need to choose the withdrawal types. Your online account may show different categories but make sure it's all the withdrawal types of transactions.
You will also need the contributions (deposits) for step 4.
Your account statements can also be used to find withdrawals. They will look similar to this, showing withdrawals, but check all your statements, so you don't miss a withdrawal.
Using an online portal and account statements together may help verify that you didn't miss any transactions. Go slow and take your time.
Pro Tip: Keep copies of your calculations and the numbers you used with your tax documents. If you are audited or need to review your excess contribution math, you will have it.
3. Account balance immediately before the excess was made.
This step is usually more time-consuming than step #1 because you will likely need to look up each position's price immediately before the excess was made.
How to calculate your starting account balance
First, find the price of each position you own and multiply it by the number of shares. The share price needs to be right before your first excess contribution.
For example, if you owned Apple stock, look up the ticker Aapl, and find the share price right before the date of your first excess contribution. Use the closing price.
You can use any reputable site to find the share price, such as Yahoo Finance, or your broker-dealer may have a tool or online portal to look up historical data. On Yahoo Finance, if you looked up the Apple stock price on March 12, 2021, the price was $121.03. If you owned 100 shares that equals 100 (shares) x $121.03 = $12,103.
Pro Tip: Everything is commingled for excess contributions. It does not matter if you invested the excess contribution or left it in cash. Regardless, a portion of any growth or loss will be associated with the excess contributions. The growth associated with your excess contribution is called income attributable.
4. The amount of the excess contribution and all subsequent contributions made before the excess removal.
If you have multiple contributions including rollover contributions you will need to add them all up. Only add the contributions from the date of the first excess contribution up to the date you are removing the excess contribution.
For example, if you contribute $500 monthly to your Roth IRA and your November and December contributions were excess contributions include the $500 per for each of these months. In addition, if you also rolled over $10,000 into the Roth IRA, include that. In this example, your starting balance will include $500+$500+$10,000 = $11,000 plus your initial account balance.
If you also contributed $500 in January of the following tax year before you removed the excess contribution, you will include that as well.
5. Any time deposit (or other investment) penalties that will be applied due to the excess removal.
If you're invested in securities such as a CD you may have time deposit penalties. Add them up for step 5.
Example #1 Roth IRA Excess removal worksheet
In this example, I contribute $6,000 to the Roth IRA and the account grows to $7,000. There was no existing Roth IRA before the excess contribution. The modified adjusted gross income is $500,000, way over the income limit, therefore the full $6,000 contribution was considered an excess contribution.
The entire balance will need to be removed and here is the correlating worksheet. If all your contributions are excess contributions you can just remove all the money from the account without doing these calculations.
We are going through this as an example to show how the math is done.
The growth of this Roth IRA is 100% attributable to the contribution since there was no account balance immediately before the excess was made and no additional contributions before the excess is removed.
Example #2 Roth IRA Excess removal worksheet
In this example, we will contribute $500 monthly to the Roth IRA but only the last $500 will be the excess contribution.
The excess contribution amount is $500 and the net income attributable is $83.33. Adding them together brings the total amount to be removed to $583.33.
Download the Roth IRA excess contributions worksheet.
Method #2 Roth IRA Absorb to next year
The absorb method moves the excess contribution to the following year. If the excess is still more than the following year's allowable contribution limit then the amounts will be carried forward until the excess is completely absorbed. The 6% penalty is assessed on the excess amount each year and calculated based on the excess remaining.
For example, if you contributed $15,000 to your Roth IRA in 2021 when you were eligible for a maximum contribution of $6,000, then $9,000 is the excess contribution. In 2022, if you were again eligible for a $6,000 contribution, you would still have $3,000 carry forward to 2023. The 6% penalty would apply to the $9,000, then again to the $6,000, and finally to the remaining $3,000.
It's a costly mistake and should be corrected as soon as possible.
Note, that the growth portion, if any, is not included in this calculation and remains in the Roth IRA. The penalty is calculated and paid using IRS form 5329 for each year.
Method #3 Roth IRA Recharacterization
The recharacterization method moves the excess contribution to the traditional IRA from the Roth IRA. The same calculation above, using the net income attributable is also completed in this method. The amount that will need to move from the Roth IRA to the traditional IRA includes the excess and the net income attributable. In the case of a loss, the amount moved will be less than the original excess contribution.