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5 Quick Questions: Excess IRA Contributions

Today is a very special day here at the Slott Report. Why is that, you ask? Well, today is the start of a brand new feature here at the blog called "5 Quick Questions." From time to time you will see new 5 Quick Questions on all sorts of IRA and retirement account related topics.

Many of the IRA rules that affect people like you on a day in and day out basis are complex and difficult to understand. By boiling these rules down to just the very basics - who a rule applies to, what the rule is, where the rule is applicable, when you need to take action and why it's important to do so - we hope that you can take this information and make a meaningful difference in your financial success.

5 Quick Questions: Excess Contributions
Who: Anyone who has contributed more to an IRA, Roth IRA or combination of the two than is allowed under the law.

What: The 2011 IRA contribution limit was $5,000, or $6,000 if you were 50 or older by the end of 2011. The $5,000 ($6,000 for 50 or older) limit is a cumulative limit for both traditional IRA and Roth IRA contributions. In other words, if the total of your traditional IRA and Roth IRA contributions exceeds $5,000 ($6,000 if 50 or older), then you have an excess contribution.

Where: If you contributed more than you should have and all your contributions were made to a traditional IRA, then your excess contribution is obviously in the traditional IRA. If you contributed more than you should have and all your contributions were made to a Roth IRA, then your excess contribution is obviously in the Roth IRA. If, on the other hand, you made contributions to both types of IRAs, any excess contributions are first allocable to your Roth IRA.

When: Excess IRA and/or Roth IRA contributions should be removed as soon as possible. To avoid penalties, an excess 2011 IRA/Roth IRA contribution must be removed by October 15, 2012.

Why: Excess contributions are subject to a 6% penalty for each year they remain in the account. That means this problem generally won’t go away on its own! And the penalty just keeps adding up each year. Failing to report and/or pay the penalty on time could lead to other negative consequences, such as incurring further related penalties and accumulating interest on the amounts you owe.

* So you might be thinking, ok, I know the who, what, when, where and why, but now how do I actually do this? Well, the how is often the most difficult question to answer because policies and procedures can vary from one institution to another. So, if you think this information may apply to you, the best answer to “how” might simply be “Carefully, and with the help of a knowledgeable financial professional.”

-By Jeff Levine and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

I transferred a stock from my IRA to my regular (non IRA account) and then transferred the exact same number of shares of the same stock back into my IRA within 60 days. However, the value of those shares was $10,000 higher.

Do I have a problem because I put more money into the IRA even though I transferred the same number of shares?


There is no problem. Your distribution of property (shares of stock) from your IRA qualifies to be rolled over tax-free within 60 days only if the identical stock is rolled over to a receiving IRA. It is common for the value of stock to change during the 60-day window. That’s OK and still qualifies as a tax-free rollover. When your tax return is filed for the year, your tax preparer may want to attach a note to explain the different values.