If your total IRA contributions (both traditional and Roth combined) are greater than your allowed amount for the year, and you haven't withdrawn the excess contributions, you'll owe a 6% penalty tax on the excess contribution and you must complete Form 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
This penalty tax will be assessed every year on all excess contributions (including those from prior years) until you withdraw the excess contributions.
Avoid paying the penalty tax by withdrawing the excess amount before the due date. Remember: Any earnings (including interest or other income) on the withdrawn contributions should still be included in your gross income.
An excess contribution could be from your contribution, your spouse’s contribution, your employer’s contribution, or an improper rollover contribution.
If your employer makes contributions on your behalf to a SEP IRA, see Chapter 2 starting on page 5 of Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Read the IRS Publication 590-A Contributions to Individual Retirement Arrangements (IRAs) on page 35 for more information.
Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:
The taxable compensation limit applies whether your contributions are deductible or nondeductible.
In general, if the excess contributions for a year aren’t withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of your tax year.
The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes, later.
You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.
You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.
In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3.
If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).
On page 44 (for Roth IRAs):
If you timely filed your 2020 tax return without withdrawing a contribution that you made in 2020, you can still have the contribution returned to you within 6 months of the due date of your 2020 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.