If you made an error with IRA contributions or discover one, there still is time to correct it. But not much time—the deadline for fixing those mistakes is Oct. 16, 2023.
Among the errors that could cause someone to seek to make an adjustment, observes Sarah Brenner, Director of Retirement Education at the Slott Report, could be (1) finding that income was too high after a Roth IRA contribution was made for 2022; and (2) making a contribution to a traditional IRA but then finding it was not deductible. She adds that it also is possible that an account holder may have made a contribution to an IRA, but then changed his mind and decided he would prefer to contribute to a Roth IRA or perhaps not contribute to any IRA at all.
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The deadline for correcting an excess contribution to an IRA is April 15—the deadline for making most income tax filings; however, there can be extensions.
Functionally, however, the deadline is Oct. 15 of the year after that for which that contribution was made, since the IRS said that taxpayers who file on time have six months from that pre-extension deadline. However, this year, that deadline is Oct. 16 since Oct. 15 is a Sunday.
That Oct. 15/16 deadline also applies to changing a contribution to an IRA that was not too big, but simply was not the size that one wants to make.
Making a Correction
There are two ways to change an IRA contribution, says Brenner.
Recharacterizing the contribution. Recharacterization—which is reportable and is not taxed—moves a contribution from one type of IRA to another. A recharacterized contribution will be treated as though it had been originally made to the IRA to which it is moved. However, it must be made in the tax year—it cannot be done in the next.
Withdrawing the contribution. With a withdrawal, the contribution and the net income attributable (NIA) are distributed. Brenner suggests that one who wants to withdraw a contribution tell the IRA custodian that the resulting distribution is a return of an excess contribution.
In fact, Brenner adds, the NIA must accompany the contribution—regardless of whether one chooses recharacterization or withdrawal. It is calculated based on the entire value of the IRA during the time the contribution was in the IRA. That calculation is done using a formula the IRS approved.
Consequences of Not Making a Correction
If one does not correct an excess contribution in time, a 6% penalty applies to that contribution every year that it remains in the IRA.
Excess contributions are reportable on IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
Finding out More
More information about excess contributions, and worksheets relevant to them, are found in IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). It is available here.