Fixing Excess Retirement Plan Contributions: IRAs v. 401(k)s

Taxpayers who contribute more than permitted to traditional retirement accounts can become subject to penalties if the excess contribution is not promptly "fixed"--however, the process for the so-called fix depends on the type of plan involved. For excess IRA contributions, the penalty does not apply if the taxpayer removes the excess contribution (along with the associated earnings) from the IRA by October 15 of the year after the year the excess contribution was made. The IRA owner can also elect to recharacterize the excess as a Roth IRA contribution. Taxpayers are also permitted to carry forward the excess contribution and apply it to the next year's permitted contribution, but the 6% penalty for excess contributions will continue to apply in the year the excess contribution was made. Excess 401(k) contributions must be removed by April 15 of the year following the year in which the excess contribution was made. While no specific "penalty" applies for failure to remove the excess amounts, those excess amounts must be included in the account owner's taxable income--essentially meaning that the funds will be taxed twice, once in the year of the excess contribution and again when the funds are eventually distributed. For more information on the rules governing excess IRA contributions, visit Tax Facts Online. Read More: Link to Q3669.