The IRA contribution limit for most taxpayers is $5,500 if under 50 and $6,500 if over 50. While you can contribute to an IRA for a spouse who isn’t working (as long as you file a joint tax return), the total contribution for both you and your spouse can’t exceed your joint taxable income or double the annual IRA limit, whichever is less. IRA contributions in excess of the limit are subject to a 6 percent excise tax, unless the excess amount is removed by the deadline along with any net income attributable. Net income is determined by using the following formula: Net Income – Contribution x [(Adjusted Closing Balance – Adjusted Opening Balance)/Adjusted Opening Balance].
The deadline for removing excess contributions is the individual’s tax-filing deadline, including tax filing extensions. For individuals who file their tax return on time, or file for an extension on time, an automatic six-month extension applies. If the excess contribution is not removed, than the 6 percent excise tax applied.
In a recent Tax Court, a couple found out the hard way, that putting too much money in an IRA can lead to tax problems. After selling a house in 2007, each one contributed $200,000 to IRAs, which far exceeded the annual contribution limit. When they discovered the mistake in early 2010, they informed the Internal Revenue Service and withdrew the excess amounts. They agreed they owed a 6% file on the excess pay in and earnings for 2007 and 2008, but not for 2009 because they took out the excess before the due date for that return.
The problem, if you have made an excess contribution to your IRA, you need to remove it before your filing deadline. They contributed the funds in 2007 … not in 2009 … and took the distributions in 2010, so no relief was available to them, an Appeals Court decides (Wu, 7th Cir.).
IRAs are great tools to plan for retirement income. However, contributions have to be within the allowable limits. Be aware that when you “carry forward” an excess to a future year, you’ll have to pay a 6 percent penalty until the excess is absorbed or corrected. If not, the 6 percent excise tax will be applied against the excise contribution each tax year until removed.
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Author’s email: wolff2000@earthlink.net
