Avoiding Excess IRA Contributions Penalties

by Prof. Robert Bloink and Prof. William H. Byrnes

Now that tax season is behind us, some clients may have realized that they contributed too much to their IRAs for the 2023 tax season. Fixing these mistakes is critical to avoiding ongoing penalties. In addition to an initial penalty, the IRS continues to impose penalties until the taxpayer actually corrects the mistake. While simply withdrawing the excess contribution may seem like a simple fix, in reality many clients are faced with scenarios that are far more complicated, whether because they consolidated accounts, executed a Roth conversion or otherwise. Understanding the rules for withdrawing excess contributions even in complex situations is critical to ensuring the client is not faced with accumulating penalties going forward.

IRA Contribution Limits: The Basics

Like any tax-preferred account, IRAs and Roth IRAs are subject to certain legal limitations. For 2023, the maximum that a taxpayer can contribute to all traditional IRAs and Roth IRAs was $6,500 ($7,500 if the taxpayer was at least 50 years old). However, if the taxpayer’s compensation for the year is less than the annual contribution limit, contributions are limited to their taxable compensation.