Avoiding the 6% IRA Excess Tax: Timely Withdrawals and Reporting

This guide walks you through the full process to fix excess contributions and avoid the 6% excise tax. It explains timing, steps, forms, and what the IRS expects at each point. The rules here apply to a traditional IRA, Roth IRA, Coverdell ESA, Archer MSA, HSA, and ABLE account. As of September 13, 2025, these rules match recent years, with no major changes reported.

Quick overview

• Spot the excess and act before the tax return due date (including extensions).
• Ask the custodian to remove the excess and the earnings it produced.
• Report the earnings in the year you made the excess contribution.
• If you miss the deadline, pay a 6% excise tax each year the excess remains until you fix it.

According to analysis by VisaVerge.com, early correction is the safest move because the 6% charge repeats every year until the excess is fully resolved.

Stage 1: Identify the excess and the clock you’re on

What counts as “excess contributions”? Any amount over the legal limit for the year.

Common ways it happens:
– You deposit more than the annual limit into a traditional IRA or Roth IRA.
– Your Modified Adjusted Gross Income (MAGI) is too high for a Roth IRA and you still contribute.
– You contribute to multiple accounts and exceed the combined cap.
– You add to accounts like an HSA or ABLE beyond the yearly limit.

Key timing rule:
– You must remove the excess and its earnings by the tax return due date for that year, including any extension.
– For most calendar-year filers, that’s April 15 or October 15 if you filed an extension.

Important limits note:
– You cannot carry an excess back to a prior year, even if you didn’t max out that prior year.
– You may apply an excess to a later year if you haven’t yet hit that later year’s limit.

Stage 2: Decide your correction route and deadline

You have two main paths:

1. Timely correction (by the tax return due date, including extensions)
   • The excess is treated as if it was never contributed.
   • No 6% excise tax applies.
   • The earnings are taxable in the year the excess was made.

1. Miss the deadline
   • You owe a 6% excise tax on the excess for that year.
   • The 6% repeats each year the excess remains in the account.
   • You report the tax on Form 5329 and include it on Schedule 2 of Form 1040.

Estimated timeframe:
– Identify and request removal: 1–2 weeks with your custodian.
– Custodian processing: often 1–3 weeks, depending on the firm.
– Tax reporting: during return preparation for that tax year.

Stage 3: Work with your custodian to remove the excess

What you should do:
1. Call or message your IRA custodian or plan administrator and say you need to “remove an excess contribution and earnings.” Act quickly.
2. Complete the custodian’s distribution form. State the year of the excess and that the distribution includes earnings.
3. Keep records of your request and any confirmations.

What your custodian will do:
– Calculate the earnings tied to the excess.
– Distribute the excess amount plus earnings to you.
– Issue a Form 1099-R for the withdrawal year showing the earnings that are taxable.

What to expect from the IRS:
– If corrected by the deadline, there’s no 6% excise tax. You still report the earnings in the year the excess was made.

Stage 4: Report the earnings in the correct year

• Even with a timely correction, the earnings must be included in your gross income for the year you made the excess contribution.
• If you’re under 59½, the earnings may also be subject to a 10% early withdrawal penalty unless an exception applies.
• Your custodian will send a Form 1099-R for the distribution year, with codes that indicate it was a timely correction.

Useful IRS forms and guidance:
– Form 1099-R (Distributions): see the IRS form and instructions at Form 1099-R.
– Form 5329 (Additional Taxes on Qualified Plans): if you owe the 6%, report it on Form 5329.
– Schedule 2 (Form 1040): include the additional tax on Schedule 2.
– For broad guidance, review Publication 590: Individual Retirement Arrangements (IRAs).

Stage 5: How the 6% excise tax works if you miss the deadline

• If you don’t remove the excess and earnings by the due date (including extensions), the IRS charges a 6% excise tax on the excess amount for each year it stays in the account.
• You compute the tax on Form 5329 and carry it to Schedule 2 of Form 1040.
• The 6% applies separately to each account type. An excess in a traditional IRA triggers a separate 6% from an excess in an HSA.
• The 6% continues annually until you either remove the excess or apply it to a later year’s limit (if you have room that later year).

Stage 6: Real-world timing and case examples

• Maria (age 35): Made a $1,000 excess in 20X2. She withdrew the $1,000 and $50 of earnings by April 15, 20X3 (the due date). She must include the $50 as income for 20X2. She doesn’t report the $1,000 as income and doesn’t pay the 6%. Her custodian issues a Form 1099-R showing the 20X2 taxable earnings.

• Pat Jones (age 45): Overcontributed $500 to his traditional IRA in 20X1. It earned $5 in 20X1 and $6 in 20X2, but he didn’t withdraw the excess by the extended due date. He owes $30 for 20X1 (6% of $500) and reports this on Form 5329 and Schedule 2.

• Sam (age 40, filing jointly): Contributed $6,500 to a Roth IRA in 20X4. Due to high income, 40% of his contribution counts as excess, making a $2,600 excess and $400 in earnings. He must remove $3,000 by the due date or pay the 6% excise tax.

Stage 7: Special rules that can help or hurt

• Timely withdrawal treated as never contributed: If you withdraw the excess by the due date (including extensions) and withdraw the earnings, that contribution is treated as if it never happened. The earnings are taxed in the year of the original excess.
• No applying to past years: You cannot fix a prior year’s shortfall with a later excess.
• Applying to a later year: You may apply the excess to a later year’s limit if you haven’t already hit that later year’s limit.
• If you contributed to both a traditional IRA and a Roth and exceeded the combined limit, remove the excess from the Roth first if the rules require it.
• The same 6% rule applies to Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, and ABLE accounts if excess amounts remain.

Stage 8: What authorities expect and when

From you:
– Prompt contact with your custodian.
– Accurate reporting of earnings in the year the excess was made.
– Filing Form 5329 if the excess remains past the deadline.

From your custodian:
– A clear process to remove excess and earnings.
– Timely processing and a Form 1099-R with the correct codes.

From the IRS:
– Consistent application of the 6% excise tax each year the excess remains.
– Established deadlines: return due date, including extensions.

Key takeaway: Fix excess contributions quickly to avoid the recurring 6% excise tax.

Stage 9: Common pitfalls and how to avoid them

Common mistakes:
– Waiting too long to act — start correction as soon as you notice the excess.
– Forgetting to remove earnings — you must remove both the excess and its earnings to avoid the 6%.
– Reporting earnings in the wrong year — the earnings are taxed in the year the excess was made, not the year you withdraw them.
– Letting the excess linger — the 6% repeats annually until corrected.

How to avoid them:
– Regularly review contributions and income limits.
– Contact your custodian immediately upon discovering any overcontribution.
– Keep documentation of the correction and the custodian’s calculations.

Stage 10: Policy status for 2024–2025

• The core framework has not changed. The IRS still requires removal of excess amounts and earnings by the return due date (with extensions) to avoid the 6% excise tax.
• Contribution limits and phase-out ranges do adjust for inflation, but the correction process remains the same for the United States 🇺🇸 as of the dates noted.

Action checklist you can use today

1. Confirm whether you have excess contributions in any account, especially a traditional IRA or Roth IRA.
2. If yes, contact your custodian and request removal of the excess and earnings.
3. Mark the deadline: Tax return due date, including extensions.
4. When you file:
   • Include the earnings in the year of the excess.
   • If late, complete Form 5329 and add the tax to Schedule 2.

Remember: Quick action can keep you from paying the 6% excise tax year after year.