Remember, rollovers and contributions have tax reporting implications and specific guidelines. We need to know how to identify and handle your funds to make sure your account accurately reflects all activity.
It is a good practice to make sure all of your financial records are correct and up to date. Reconciling account statements, keeping track of income and expenses, and monitoring account performance are just a few aspects to be aware of.
Equity Trust recognizes self-directed IRA owners play a more hands-on role with their account and provides tools to account holders to manage their accounts.
Excess IRA or Roth IRA Contributions
Prevention is one of the best ways to reduce avoidable errors with your IRA. Excess contributions, also known as ineligible contributions, need to be avoided, and corrected if they occur.
An ineligible or excess contribution happens when you contributed more than the allowable amount based on:
- Year –The limit for the prior year may be lower than the limit for the current year. You may not realize how much you contributed during the course of the year and contribute more than allowed.
- Income Limit – Roth IRAs have MAGI based contribution limits/filing status criteria. If you contribute more than your income bracket allows, this is an excess contribution.
While rollovers do not count as an IRA contribution, they have their own rules, including items on ineligible/excess contributions.
Get more details on ineligible rollover amounts in IRS Publication 590 and this IRS page.
What Happens if You Overcontibuted to a Roth IRA or Traditional IRA?
If you have over-contributed, there is a time window to make a correction without penalty. You must remove the excess contribution amount, along with any earnings from those funds by your tax filing deadline – typically April 15.
If you filed your taxes by this deadline, you automatically have six additional months to remove the excess.
It’s important to note you won’t be taxed on the distribution of the excess contribution if you correct the situation in a timely manner, but the taxable environments of your plan will go into effect if you also need to distribute any earnings from the excess funds.
This distribution includes being subject to any penalties for premature withdrawal of funds, if applicable. For every year the excess/ineligible contribution remains in the account, those funds are subject to a 6-percent penalty that accrues for every year they remain in the account.
Consulting with a tax advisor or CPA can prove beneficial if you find yourself in an excess/ineligible contribution situation.
Once you know the action you want to take to correct the matter, reach out to our service team to for assistance in completing the necessary paperwork to remedy the situation.
Not sure if you over-contributed? Download the complete Contribution Limits Guide now.
Am I eligible to make a contribution? How much can I contribute?
The IRS publishes maximum IRA contribution limits and catch up provisions each year. Summaries for each type of contribution can be found on Contribution Limits.
When I roll over funds from an employer-sponsored or qualified retirement plan, do they need to go directly into a traditional IRA?
No. Per IRS guidelines, rollovers from a qualified plan can be rolled over into a traditional or Roth IRA. If the rollover is made directly to the Roth IRA, the transferred amount is subject to income taxation but avoids the 10-percent early distribution penalty. You should consult with your plan administrator regarding the permissible withdrawal options allowed under the tax-qualified plan.