Ask Bob: How to Fix an "Overcontribution" to an IRA

Robert Powell, CFP®

Question

My wife and I just filed our 2019 taxes and I think we may have "overcontributed" to our Roth IRAs. We are a married filing jointly couple and I’m not sure whether we're below the phase-out, in the phase-out, or ineligible. I read that it’s based on modified adjusted gross income but I don’t know what that is. Also, if it turns out that I did overcontribute what should I do? I read something about there being a penalty but I’m not sure I get how that works if I did overcontribute. Does it still apply if I withdraw the overcontribution – if I did in fact overcontribute? By the way, how would the IRS ever know if I overcontributed or not?

Answer

The phaseout range for Roth IRA contributions for 2019 applies when modified adjusted income (MAGI) is between $193,000 and $203,000 for taxpayers who are married filing jointly, says Sarah Brenner, an IRA analyst with Ed Slott & Co.

MAGI for Roth IRA contribution purposes, she says, is just adjusted gross income (AGI) from the federal tax return with a few adjustments. For example, you would subtract any income resulting from a conversion to a Roth IRA.

"If you have an excess contribution to a Roth IRA for 2019, you can fix it by withdrawing it, plus net income attributable, by October 15, 2020," says Brenner. "This would avoid the 6% excess contribution penalty that accrues each year an excess contribution remains in an IRA."

It is hard to know exactly how the IRS enforces these rules but they can determine MAGI by looking at the tax return and the custodian will be reporting the contribution to the IRS on Form 5498, says Brenner.

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