If a taxpayer contributes more to their IRA than allowed, they can avoid penalties by withdrawing the excess contribution and any earnings before the tax filing deadline (typically April 15, or October 15 with an extension). This article outlines how to properly report such a withdrawal.
Withdraw the Excess Contribution and Earnings
To avoid the 6% excise tax on excess IRA contributions:
- The taxpayer must withdraw:
- The excess contribution amount, and
- Any net income attributable (NIA) to that excess (i.e., earnings or losses).
- This must be completed by the original tax filing deadline, typically April 15, or October 15 if an extension was filed.
- The withdrawal must be specifically designated as a return of excess contribution.
Do Not Report the Excess Contribution on the Tax Return
If the excess was withdrawn timely:
- The IRS treats the contribution as if it was never made.
- Do not report the excess amount on Form 1040 or Form 8606.
- No Form 5329 is required unless the excess was not withdrawn by the deadline.
Important: If the excess was not withdrawn in time, a 6% penalty applies for each year the excess remains in the account.
Report the Earnings as Taxable Income
Even though the excess contribution is disregarded:
- Any earnings withdrawn with the excess are taxable in the year the contribution was made.
- These earnings must be included in the taxpayer’s gross income for that year.
- If the taxpayer is under age 59½, the earnings may also be subject to a 10% early withdrawal penalty, unless an exception applies.
Example: If a 2025 excess contribution is withdrawn in March 2026, the earnings are reported on the 2024 return.
Form 1099-R Reporting
The IRA custodian will issue Form 1099-R in the year following the withdrawal:
| Box | Description | Notes |
|---|---|---|
| 1 | Gross distribution | Includes both excess and earnings |
| 2a | Taxable amount | Includes only the earnings |
| 7 | Distribution code | Typically PJ (return of contribution with earnings) |
Code “P” indicates the earnings are taxable in the prior year (year of contribution), and “J” indicates the taxpayer is under age 59½.
Losses Are Not Deductible
If the IRA experienced a loss:
- The withdrawn amount may be less than the original contribution.
- The IRS does not allow a deduction for the loss.
- Only the actual earnings (if any) are included in income.
Example: A $1,000 excess contribution loses value and is worth $950 at withdrawal. The taxpayer withdraws $950. No income is reported, and no deduction is allowed for the $50 loss.
Example
Situation:
A taxpayer contributes $8,000 to a Roth IRA in 2025. Their limit is $7,000. They withdraw the $1,000 excess and $50 in earnings on March 1, 2026.
Reporting:
- The $1,000 excess is not reported.
- The $50 in earnings is included in 2025 income.
- A 1099-R is issued in January 2027 with:
- Box 1: $1,050
- Box 2a: $50
- Box 7: Code PJ
Notes
- Timing matters: Ensure the withdrawal is completed by the deadline to avoid penalties.
- Software input: Most tax software will prompt for the 1099-R and handle the income attribution correctly.
- Amended returns: If the 1099-R is received after filing, consider whether an amended return is necessary to report the earnings.
Additional Information
If you did not withdraw your excess contributions by the tax filing deadline, please see our article on how to report the excess contributions on your tax return.