What are the tax consequences of exceeding Roth IRA contribution limits and how do I correct an excess?
Executive summary
Exceeding Roth IRA contribution limits triggers a recurring 6% excise tax on the excess for every year it remains in the account and can create taxable events for any earnings tied to the excess; the IRS provides specific correction paths—withdraw the excess plus earnings, recharacterize, or carry the excess forward—each with distinct tax and reporting outcomes [1][2][3]. Timely action before the tax-filing deadline (including extensions) avoids repeated 6% penalties and simplifies reporting; missed deadlines force additional forms, possible amended returns, and continued excise taxes until corrected [4][2].
1. What counts as an excess contribution and how big are the limits
An excess contribution occurs when total contributions to all IRAs (Roth plus traditional combined) exceed the IRS annual limit or when a Roth contribution is made despite MAGI that disqualifies or phases down eligibility; IRS limits are adjusted periodically (for example, $7,000 in 2025 and $7,500 in 2026, with higher "catch‑up" caps for those 50 and older) and the combined cap applies across all IRAs, not per account [5][6][1].
2. The immediate tax consequence: the 6% excise tax and taxable earnings
The core penalty is a 6% excise tax assessed on the excess amount for every year it remains uncorrected in any IRA, applied annually until the excess is removed or absorbed into a later year’s contribution limit [1][7]. In addition, if excess contributions generate earnings, those earnings are taxable when withdrawn and must be reported as ordinary income for the year to which the earnings are attributable [8][9].
3. Best‑case fix before the tax‑filing deadline: remove excess plus earnings
If the excess and any earnings are withdrawn by the tax-filing deadline (including extensions) for the year of the contribution, the excise tax can be avoided; the distribution of earnings is taxable income in the year the contribution was made, and custodians report the withdrawal on Form 1099‑R [2][6][9]. Removing the full excess plus associated earnings before the deadline is the most straightforward corrective route recommended by brokers and the IRS [10][6].
4. Recharacterization and carrying forward as alternatives (and their limits)
Recharacterization—treating the original Roth contribution as a traditional IRA contribution—can erase an excess if done by the filing deadline (with the IRS treating the money as if it were originally contributed to the other account), which often neutralizes the penalty if the converted amount fits within the applicable limits [6][3]. Carrying the excess forward into the next tax year is allowed but does not avoid the 6% tax for the year it sat in the account; it simply reduces the amount one can contribute the next year by the excess amount [3][2].
5. What happens after the deadline: forms, continued penalties, and amended returns
If excess contributions are not corrected by the filing deadline, the 6% excise tax must be reported on Form 5329 for each year the excess exists, and custodians will issue a Form 1099‑R for distributions of excess and earnings when they are finally removed; if a taxpayer already filed, removal may require amending returns to reflect taxable earnings and to seek refund of excise if appropriate [11][6][12]. The IRS expects Form 5329 reporting whether or not the excess has been removed by the deadline [11].
6. Practical tradeoffs, traps and when to consult a pro
Practical choices come down to timing, income expectations, and whether one can legally recharacterize or apply the excess to the next year: withdrawing excess and earnings before the deadline avoids repeated 6% charges; recharacterizing can be cleaner if timely; carrying forward is easy but costly in excise taxes and may be invalid if future eligibility is doubtful, so advisors and custodians commonly recommend tax‑professional review to avoid compounding errors [2][3][7].