Understanding IRA Overcontribution Penalties

If you contribute more than the allowed limit to an IRA (Individual Retirement Account), the IRS imposes a 6% excise tax on the excess amount EACH YEAR it remains in the account. Here’s how it works:

1. Identification of Excess: Any contribution over the annual limit, including any employer contributions, is an "excess contribution."
2. Penalty Calculation: The 6% penalty is applied YEARLY to the excess amount until it's withdrawn or corrected.
3. Correction: To avoid further penalties, you must withdraw the excess contributions and any earnings on them before the tax filing deadline for that year (including extensions).

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