You Followed the Rules. So How Did You End Up with an Excess IRA Contribution?
Most IRA mistakes look like mistakes from the outside. You missed a deadline. You withdrew too early. You forgot to take your RMD.
But excess IRA contributions are different. They often happen to people who are doing everything right — contributing consistently, planning ahead, managing multiple accounts. That's what makes them so frustrating, and so important to understand before they happen to you.
Here's what triggers them, and what to do if one finds you anyway.
What Is an Excess IRA Contribution?
An excess contribution is any amount deposited into an IRA that isn't permitted under IRS rules. It doesn't belong there — and the IRS will charge you a 6% excise tax on that amount every year it remains in the account. Left uncorrected, that penalty compounds. The good news: excess contributions can almost always be fixed, often without lasting penalty. But you have to act.
Six Ways It Can Happen
1. Your income is too high for a Roth IRA.
Roth IRA eligibility phases out above certain income thresholds — and those thresholds can sneak up on you. A strong year, a bonus, a business distribution, a stock sale: any of these can push your modified adjusted gross income above the limit. If you contributed assuming you'd qualify and your income came in higher, you now have an excess contribution. (Note: traditional IRAs have no income limit for contributions, so this particular trap is Roth-specific.)
2. You don't have enough earned income.
IRA contributions must be funded by earned income — wages, self-employment income, and similar sources. Social Security, rental income, and investment returns don't count. If your only income comes from those sources, you may not be eligible to contribute at all, regardless of how much money you have. Many affluent retirees fall into this category without realizing it.
3. You exceeded the annual contribution limit across multiple accounts.
The annual IRA contribution limit applies to your total IRA contributions — not per account. If you have IRAs at multiple custodians and contributed to each one, you may have exceeded the combined limit without any single institution flagging it.
4. You violated the 60-day or once-per-year rollover rule.
When you take a distribution from an IRA intending to roll it over, you have 60 days to complete the rollover — and you can only do one IRA-to-IRA rollover per 12-month period. Miss the deadline or roll over a second time in the same year, and what was intended as a rollover becomes an excess contribution instead.
5. You rolled over your RMD.
This one catches a lot of retirees off guard. Required Minimum Distributions cannot be rolled over — period. In fact, the RMD for the year must be taken before any other funds in the account become eligible for rollover or Roth conversion. If you mistakenly roll over your RMD, that amount is treated as an excess contribution.
6. You contributed to an inherited IRA.
If you inherit an IRA from someone other than a spouse, you cannot make additional contributions to that account or merge it with your own IRA. Doing either creates an excess contribution.
What To Do If It Happens
The problem won't resolve on its own. An excess contribution that sits in your IRA continues to generate a 6% penalty each year until it's corrected. The correction options depend on your situation — when the mistake occurred, what the account has done since, and what type of IRA is involved.
This is exactly the kind of technical detail that gets missed when financial and tax planning aren't coordinated. At California Retirement Advisors, we work with clients to catch these issues before they become annual penalties — and to build the kind of integrated plan that keeps IRA strategy, income planning, and tax exposure working together.
If you have questions about your IRA situation, you're welcome to schedule a 20-Minute Due-Diligence Q&A Call below.