An excess contribution occurs when you put more money into tax-advantaged accounts—like Individual Retirement Accounts (IRAs), 401(k)s, or Health Savings Accounts (HSAs)—than the Internal Revenue Service (IRS) permits in a given year. The IRS sets strict annual contribution limits to maintain the tax benefits these accounts offer. When these limits are surpassed, the extra money is called an “excess contribution.”
The Excess Contribution Return Policy provides a process to correct these over-contributions, helping account holders avoid a recurring 6% excise tax on the excess amount for each year it remains in the account without correction (IRS Publication 590-A and IRS Publication 969).
Common Causes of Excess Contributions
- Unaware of current limits: Contribution limits update annually. For example, the combined contribution limit for IRAs increased from $6,500 in 2023 to $7,000 in 2024 (with $1,000 catch-up for age 50+). See our detailed IRA contribution limit guide for current figures.
- Multiple accounts: Contributing to several IRAs or multiple 401(k) plans can unintentionally exceed combined limits.
- Income changes: Roth IRA eligibility and contribution amounts depend on your Modified Adjusted Gross Income (MAGI). Income increases during the year can disqualify or reduce your allowed contribution.
- Employer & employee contributions: Employer contributions combined with your own can push your total over limits, especially in SEP IRAs or 401(k) plans.
How to Fix an Excess Contribution
- Identify the excess: Review your account statements and contribution amounts carefully.
- Withdraw the excess amount and earnings: Notify your financial institution to remove the excess and any income generated by that excess contribution. Earnings are taxable in the year the contribution was made.
- Meet IRS deadlines: Withdraw the excess and earnings by the tax filing deadline (typically April 15 of the year after the excess was made, with extensions allowed). This avoids the 6% excise tax penalty.
For 401(k) plans, plan administrators usually detect excess deferrals and return them by April 15, preventing penalties. If you’re a highly compensated employee, specific plan rules apply.
Consequences of Not Correcting Excess Contributions
Failing to remove excess contributions triggers a 6% penalty each year on the excess amount until corrected. This penalty reduces your savings growth and can compound if left unresolved.
Tips to Avoid Excess Contributions
- Stay informed about current contribution limits for all accounts.
- Coordinate contributions across multiple accounts to stay within limits.
- Monitor income levels impacting Roth IRA and HSA contributions.
- Communicate with your employer to understand how their contributions affect your limits.
- Set reminders for tax deadlines and review contributions regularly.
2023 & 2024 Contribution Limits Overview
| Account Type | 2023 Limit (Under 50) | 2023 Catch-Up (50+) | 2024 Limit (Under 50) | 2024 Catch-Up (50+) |
|---|---|---|---|---|
| Traditional & Roth IRA | $6,500 | $1,000 | $7,000 | $1,000 |
| 401(k), 403(b), TSP | $22,500 | $7,500 | $23,000 | $7,500 |
| HSA (Self-only) | $3,850 | $1,000 | $4,150 | $1,000 |
| HSA (Family) | $7,750 | $1,000 | $8,300 | $1,000 |
For detailed IRS guidelines, see IRS Publication 590-A and Publication 969.
Understanding and promptly addressing excess contributions ensures your retirement and savings plans stay tax-advantaged and penalty-free. If you’re unsure about your contributions, consult your financial institution or a tax advisor promptly to avoid costly penalties.