In this video we breakdown some of the options that exist for those who overfunded an IRA (aka they put in more than they were permitted to according to the IRS). We cover ignoring the problem (not recommended), withdrawing the excess contribution + the net income attributable, or recharacterizing the contribution (if possible).

00:00 – Intro
01:10 – How to Over-Contribute
02:37 – Courses of Action
04:01 – Option 1 (Do Nothing)
05:18 – Option 2 (Withdrawal)
07:47 – Option 3 (Recharacterize)
11:28 – Calls to Action

Vanguard Article –

IRS 590-A –

The Street Article –

What year is NIA taxable? –

Form 5329 –

Form 5498 –

Form 1099-R –

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What to do if I overfunded an IRA

Saving for retirement is an important financial goal, and one popular way to do so is by contributing to an Individual retirement account (IRA). However, there are some limitations on the amount of money you can contribute to an IRA each year. If you find yourself in a situation where you have contributed more than the allowed annual limit, it’s crucial to take appropriate action to avoid potential penalties and complications. In this article, we will discuss the three main options you have if you have overfunded your IRA: ignoring the excess contribution, withdrawing the excess amount, or recharacterizing the excess contribution.

1. Ignore the excess contribution:
While it may initially seem tempting to leave the excess funds in your IRA and hope for the best, this is not the recommended course of action. Ignoring the overfunding could result in penalties and tax implications. The IRS imposes an annual penalty of 6% on the excess contribution for each year it remains in the account. Additionally, you would still need to correct the overfunding to remain compliant with the rules. Ignoring the excess contribution should only be considered as a last resort if other options are not feasible.

2. Withdraw the excess amount:
One option to rectify an overfunded IRA is to withdraw the excess funds, along with any associated earnings, before the tax filing deadline for the year of the contribution. By doing this, you essentially undo the contribution, thereby avoiding the 6% annual penalty on the excess amount. However, you must also include the earnings from the withdrawn amount as taxable income for the year of the contribution. It’s important to note that if you are under the age of 59½, you might be subject to an additional 10% early withdrawal penalty, so make sure to consult a tax professional before taking this step.

3. Recharacterize the excess contribution:
The third option available to those who have overfunded their IRA is to recharacterize the excess contribution. Recharacterization allows you to effectively change the type of IRA to which the excess funds were contributed. For example, if you have contributed to a Traditional IRA but realize you have overfunded it, you can request a recharacterization of the excess amount into a Roth IRA or vice versa. This option can be useful if you discover the overfunding shortly after making the contribution and want to avoid the penalties and tax implications of a withdrawal. However, recharacterization must be done before the tax filing deadline, including extensions, for the year of the contribution.

To resolve an overfunded IRA, consult with a tax professional or financial advisor who can guide you through the specific steps and considerations based on your individual circumstances. They can help you determine which option is most suitable for your situation and ensure compliance with IRS regulations.

In conclusion, contributing to an IRA is an excellent way to save for retirement, but it’s important to stay within the annual contribution limits. If you find yourself in a situation where you have overfunded your IRA, don’t panic. Evaluate your options, consider the implications, and take appropriate action to correct the overfunding. By doing so, you can avoid penalties and ensure your retirement savings remain on track.