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How to Correct a 2014 Excess Contribution to a Self-Directed IRA

correct an excess contribution to an IRA with a recharacterizationWhat happens when you make a mistake and contribute more to your Traditional or Roth IRA than the rules allow? Don’t worry there are ways to correct the error.

Both Traditional and Roth IRAs have contribution limitations. Here is what you need to know:

Traditional IRAs

  • You must have earned income to contribute to a Traditional IRA.
  • You may not contribute to a Traditional IRA in the year you turn 70½.
  • For the 2014 and 2015 tax years, you may contribute $5,500 if you are under age 50 for all of 2015. The year you turn 50 you may contribute $6,500.

Roth IRAs

  • You must have earned income to contribute to a Roth IRA.
  • You may contribute to a Roth IRA at any age.
  • For the 2014 and 2015 tax years, you may contribute $5,500 if you are under age 50 for all of 2014 or 2015. The year you turn 50 you may contribute $$6,500.
  • There are income limit s to determine eligibility to contribute.

If you have contributed more than these amounts, continue reading.

What Happens If You Made an Excess Contribution in 2014

You have three choices:

  1. First option: If you made an excess contribution to one type of IRA, and you are eligible for another type of IRA, you can move the contribution, plus any earnings or losses, from one to the other. This is called a “recharacterization.” If you filed your taxes timely for 2014, you automatically have until October 15, 2015 to conduct a recharacterization. (This is the April 15 tax return date, plus extensions. This date applies even if you did not file for an extension.)
  2. Second option: Another option is to leave the excess contribution in your IRA and pay a 6 percent penalty on the amount of the excess contribution using the IRS Form 5329. The actual excess amount is carried forward and treated as a contribution for the following year (2015). If any amount carried forward is still an excess contribution, that amount will be subject to the 6 percent penalty as long as it remains as an excess in the IRA for succeeding years.
  3. Third option: You can distribute the excess contribution amount plus the earnings or loss. This must be completed by the tax return due date, plus extensions.  Similar to recharacterizations, you automatically get the six month extension from April 15 if you filed your taxes timely. This way you avoid the 6 percent penalty on the excess contribution mentioned in option two. However, the distribution of the earnings will be subject to a tax and possibly an early distribution penalty.

It’s always wise to seek the assistance of tax professional before choosing the option that is best for you. For more information on contributions to self-directed IRAs, please visit our Learning Center

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