When Over-Saving is a Problem

By Justin Bolmgren

If you put too much in an Individual Retirement Account, you can expect to hear from the Internal Revenue Service. That’s the bottom line of a new report by the Treasury Inspector General for Tax Administration, “Actions Can Be Taken To Further Improve The Strategy For Addressing Excess Contributions To Individual Retirement Arrangements.”

For 2015, the most you can contribute to all of your traditional and Roth IRAs is the lesser of: $5,500 or $6,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year. If you put in too much, you get nailed with a 6% penalty that accrues every year until the excess contribution is withdrawn. You can fix an excess contribution by taking the money out up until six months after the April 15th when your return is due for that tax year.

Most often, excess contributions are innocent mistakes.  Unaware of the complexity of rules, you are shocked by the notice and correct the issue immediately.  Below is a breakdown of recent IRS notices sent according to the aforementioned report.

According to this report, the most common mistake was contributing over the maximum contribution set by IRS.  You might ask, “How is that mistake possible?”  The maximum contributions are clearly outlined by IRS and most custodians will keep track of contributions year-to-date.  My professional speculation is this; many individuals conclude that Traditional IRAs and Roth IRAs have separate maximum contribution limits.  In fact, according to the IRS; The most you can contribute to ALL of your traditional and Roth IRAs is $5,500 (for 2014 and 2015).