Sage-Tips

How are excess IRA contributions taxed?

Excess contributions are taxed at 6\% per year for each year the excess amounts remain in the IRA. The tax can’t be more than 6\% of the combined value of all your IRAs as of the end of the tax year.

What is the penalty for excess HSA contributions?

Generally, the IRS penalty equals 6 percent of your excess contributions. For example, if you have a $100 excess contribution, your fine would be $6.00. If you contributed $1,000 over, it would be $60. This penalty is called an “excise tax,” and applies to each tax year the excess contribution remains in your account.

How do I report excess HSA contributions on my taxes?

Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. Generally, you must pay a 6\% excise tax on excess contributions.

How do I report excess Roth IRA contributions?

If your total IRA contributions (both Traditional and Roth combined) are greater than the allowed amount for the year in your situation, and you have not withdrawn the excess contributions, you must complete Form 5329 to calculate a 6\% penalty tax on the excess contribution.

How do I handle excess Roth IRA contributions?

If the excess amount is the only contribution you made to the IRA—and no other contributions, distributions, transfers, or recharacterizations occurred in the IRA—you can correct the excess by simply distributing the entire IRA balance by the applicable deadline.

How do you calculate excess contributions?

Subtract your Roth IRA contribution limit from your contributions for the year to figure your excess Roth IRA contribution. For example, if you contributed $5,000 to your Roth IRA and your contribution limit is $4,000, you’ve got a $1,000 excess contribution.

What is the modified adjusted gross income?

Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items — like exempt or excluded income and certain deductions. The IRS uses your MAGI to determine your eligibility for certain deductions, credits and retirement plans. MAGI can vary depending on the tax benefit.

What is a 5498 SA form?

Form 5498-SA reports your annual contributions to these tax-free accounts that you use to pay for medical expenses. Contributions to similar accounts, such as Archer Medical Savings Accounts and Medicare Advantage MSAs will also warrant a Form 5498-SA. This form must be mailed to participants and the IRS by May 31.

What happens if I exceed my HSA contribution limit?

You’ll pay income taxes on the excess removed from your HSA. 2. Leave the excess contributions in your HSA and pay 6\% excise tax on excess contributions. Next year you may want to consider contributing less than the annual limit to you HSA to make up for the excess contribution during the previous year.

What happens if you make an excess contribution to an IRA?

For tax years after an excess contribution is made to a traditional IRA, a taxpayer may be able to distribute the excess contribution and avoid further impositions of the excise tax if total contributions during the year of the excess contribution did not exceed the statutory dollar limit on regular contributions.

What happens if my HSA has an overage?

You have two choices, remove the overage or let it ride and pay the penalty. Alternatively, you can use an excess contribution as your HSA contribution in a future year. You just let your excess contribution sit and then apply it later; the downside is there is a 6\% per year penalty.

How can I avoid the 6\% excise tax on an IRA contribution?

The 6\% excise tax on an excess contribution may be avoided by making a “corrective distribution,” provided no deduction has been allowed for the contribution. An IRA makes a corrective distribution by timely distributing the amount of the excess contribution, together with any accumulated net income attributable to the excess contribution.