Saturday, April 8th, 2023. It’s a beautiful spring day–sunny, mid-sixties. I am in my office poring over financial documents. Why you might ask? Because I overcontributed to my IRAs.
My financial history
Like a true financial wizard (or rube?) I have a mix of 7 IRA accounts (3 traditional, 4 Roth) across 4 financial institutions (Vanguard, Merrill Edge, Principal Financial, Fidelity). Why do I have so many accounts? I opened my first Roth IRA in 2016 and have been steadily contributing to it for several years. In addition, I have worked at 3 different companies since 2018. During my employment at each company I contributed to both their 401(k) and Roth IRA retirement plans. After leaving each company, I rolled my 401(k) into a Rollover IRA (traditional IRA) and began contributing $100 to both this and the Roth IRA every month.
Upon reaching a total monthly contribution of $800, things started to unravel, as I was quickly exceeding my IRA contribution limits for the year. This, in addition to the fact that we (my wife and I) blew past the IRA contribution income limit in 2022.
This article details my research and remediation of my excess IRA contributions dating back to 2021.
What is an IRA?
An IRA, or Individual Retirement Account, is a type of investment account that is designed to help individuals save money for retirement. There are two main types of IRAs: traditional and Roth.
With a traditional IRA, contributions to the account may be tax-deductible in the year they are made, and the investment earnings grow tax-deferred until they are withdrawn. However, when withdrawals are made in retirement, they are taxed as ordinary income.
With a Roth IRA, contributions are made with after-tax dollars, but the investment earnings grow tax-free and qualified withdrawals in retirement are also tax-free.
Additionally, there are Rollover IRAs. A Rollover IRA is a type of traditional IRA. It is typically created by rolling over funds from a qualified retirement plan, such as a 401(k), into a traditional IRA. The rollover is usually done to avoid penalties and taxes that would otherwise apply if the funds were withdrawn from the qualified plan. Like other traditional IRAs, withdrawals from a Rollover IRA are taxed as ordinary income.
Contribution limits for IRAs
For both 2021 and 2022, the contribution limit for traditional and Roth IRAs was $6,000 for individuals under age 50, and $7,000 for those age 50 and older, known as the catch-up contribution. It should be noted that in 2023, the contribution limit is $6,500 for individuals under age 50, and $7,500 for those age 50 and older.
In addition to the general contribution limit that applies to both Roth and traditional IRAs, your Roth IRA contribution may be limited based on your filing status and income. In 2021 and 2022, I filed jointly with my wife, therefore the following limits applied:
| Year | Up to Limit | Reduced Amount | Zero |
|---|---|---|---|
| 2021 | <$198,000 | ≥$198,000 and <$208,000 | ≥$208,000 |
| 2022 | <$204,000 | ≥$204,000 and <$214,000 | ≥$214,000 |
It should be noted that these amounts use Modified Adjusted Gross Income (MAGI).
Determining total IRA contributions
If one has multiple IRA accounts across multiple financial institutions, how does the IRS know the total amount you contributed to all IRAs? The answer: IRS Form 5498.
IRS Form 5498 is a tax form used by IRA custodians, trustees, and issuers to report contributions, rollovers, conversions, and other information related to an individual retirement account (IRA).
The form is typically sent to the IRA account holder by May 31st of the year following the tax year in which the activity occurred. For example, if contributions were made to an IRA in 2021, the IRA custodian would send Form 5498 to the account holder by May 31st, 2022.
However, and most notably, this form is also sent to the IRS by your financial institution.
My financial landscape
Gathering my Form 5498s from all my financial institutions for 2020, 2021, and 2022, I could make the following calculations:
2020
| Institution | Account Type | Amount |
|---|---|---|
| Vanguard | Roth IRA | $2,400 |
| Merrill Edge | Rollover IRA | $1,200 |
| Merrill Edge | Roth IRA | $1,200 |
| Principal Financial | Rollover IRA | $0 |
| Principal Financial | Roth IRA | $0 |
Total: $4,800
Modified AGI: $172,033.00
2021
| Institution | Account Type | Amount |
|---|---|---|
| Vanguard | Roth IRA | $2,400 |
| Merrill Edge | Rollover IRA | $1,200 |
| Merrill Edge | Roth IRA | $1,200 |
| Principal Financial | Rollover IRA | $1,100 |
| Principal Financial | Roth IRA | $1,100 |
Total: $7,000
Modified AGI: $188,160.00
Excess contribution: $1,000
20221
| Institution | Account Type | Amount |
|---|---|---|
| Vanguard | Roth IRA | $2,400 |
| Merrill Edge | Rollover IRA | $1,200 |
| Merrill Edge | Roth IRA | $1,200 |
| Principal Financial | Rollover IRA | $1,200 |
| Principal Financial | Roth IRA | $1,200 |
| Fidelity | Rollover IRA | $400 |
| Fidelity | Roth IRA | $400 |
Total: $8,000
Modified AGI: $265,634.00
Excess contribution: $8,000
2023
| Institution | Account Type | Amount |
|---|---|---|
| Vanguard | Roth IRA | $800 |
| Merrill Edge | Rollover IRA | $400 |
| Merrill Edge | Roth IRA | $400 |
| Principal Financial | Rollover IRA | $400 |
| Principal Financial | Roth IRA | $400 |
| Fidelity | Rollover IRA | $400 |
| Fidelity | Roth IRA | $400 |
Total: $3,200
Modified AGI: - (but >$228,000)
Excess contribution: $3,200
As you can see, my clever strategy of moving companies, making more money, and increasing my automatic contributions became nonviable in 2021. In addition, I had also already contributed $3,200 to my IRA accounts in 2023 even though our modified AGI far exceeded the limit.
Taking corrective action
If you have contributed more than the maximum allowable contribution to your IRAs for the year, you will need to take corrective action to avoid potential tax penalties.
Adjust your future contributions
Since I can no longer make contributions to my IRA accounts, I adjusted my contribution amounts accordingly (i.e., to zero).Withdraw the excess contribution
It should be noted that if you withdraw an excess contribution and any associated earnings by the tax-filing deadline for the tax year in which the excess contribution was made, you will not be subject to the early withdrawal penalty. Furthermore, if you have multiple IRA accounts and have made an excess contribution to all of them, you cannot simply withdraw the excess from a single account to correct the error.
The excess contribution must be corrected across all of your IRA accounts in proportion to the amount of the excess contribution made to each account. This is known as a “proportional correction” method. The proportional correction method ensures that you do not receive a tax benefit from the excess contribution.
Thus applying the proportional correction method, I had to withdraw the excess amount from each financial institution:
2022
- Vanguard: $2,400
- Merrill Edge: $2,400
- Principal Financial: $2,400
- Fidelity: $800
2023
- Vanguard: $800
- Merrill Edge: $800
- Principal Financial: $800
- Fidelity: $800
Now, for 2021 it is a little tricky. Basically, the formula is:
(Contribution to Account X / Total contribution) x (Excess contribution)
So, solving for Vanguard, Merrill Edge, and Principal Financial for 2021:
Vanguard = ($2,400 / $7,000) x $1,000 = $342.86
Merrill Edge = ($2,400 / $7,000) x $1,000 = $342.86
Principal Financial = ($2,200 / $7,000) x $1,000 = $314.28
- Vanguard: $3,542.86
- Merrill Edge: $3,542.86
- Principal Financial: $3,514.28
- Fidelity: $1,600
NOTE: Distributions need to be made per year and per account (first Roth, then traditional).
I ended up having to call all 4 financial institutions in order to get clarification on how exactly to code the distribution as an excess contribution distribution as opposed to a normal or premature distribution in order to avoid paying the early distribution penalty.
For Vanguard, I used their Fix a contribution to an IRA flow.
Merrill Edge provides the forms for you: Accounts > Transfer Money & Securities > Transfer Case. Merrill had the worst customer service / user experience.
Principal Financial did this all for me, calculating the earnings/losses, etc. I believe this was just a limitation of their software, since their website could not provide the required forms in order to process the excess contribution. I simply gave them the amounts for 2021, 2022, and 2023 and they processed the request.
For Fidelity, I used their Return of excess IRA contributions.
Additional Notes
- Do not withhold federal taxes. This will be taxed as an early withdrawal.
- The amount of earnings returned to you, if any, will be reported as taxable income for the year in which the excess contribution was made. If you are younger than age 59 ½, the earnings may be subject to a 10% early withdrawal penalty
Conclusion
Being financially illiterate grants you no special dispensation regarding tax law. Few people realize that you can be penalized for being financially negligent, as I was. For example, you are required to take a minimum distribution each year beginning with the year you turn age 72, in order to avoid incurring a penalty. This was a wake up call for me. You have to be diligent with your finances. No one is going to check up on you–except maybe the IRS :)
Update: 2025-08-27
It is now August 2025. I have not been audited, so I think I’m good.
At the time of this writing, I had not received my Form 5498s, however, given my past contributions and financial statements, I was able to forecast the contributions to these accounts to date. ↩︎