In our last blog post, we discussed the action you need to take to correct any overfunding of retirement account. But what if you forgot to take the action to correct the mistake before the tax-filing deadline?
Double Taxation
You will have to not only report your excess deferral as income for the year you made the contribution, but also pay taxes on it in the year you finally withdraw it. In other words, you’ll get taxed twice on the same contribution.
For overcontributions to IRAs, you must also withdraw the excess contribution, plus earnings, by the same tax-filing deadline as for 401(k)s.
Two Options
But if you discover the mistake only after you’ve already filed your tax return, you have two options.
a) Within the next six months, you can file an amended return - with the excess contribution, plus earnings, removed - by the filing-extension deadline of October 17, 2016.
b) Or you can leave the excess contributions in your IRA in order to carry them over toward next year’s contribution limit - making sure, of course, to lower your ongoing IRA contributions to make room for the excess. However, you’ll have to pay a 6% penalty (via Form 5329) per year on that excess until it’s been absorbed or rectified.
Double Taxation
You will have to not only report your excess deferral as income for the year you made the contribution, but also pay taxes on it in the year you finally withdraw it. In other words, you’ll get taxed twice on the same contribution.
For overcontributions to IRAs, you must also withdraw the excess contribution, plus earnings, by the same tax-filing deadline as for 401(k)s.
Two Options
But if you discover the mistake only after you’ve already filed your tax return, you have two options.
a) Within the next six months, you can file an amended return - with the excess contribution, plus earnings, removed - by the filing-extension deadline of October 17, 2016.
b) Or you can leave the excess contributions in your IRA in order to carry them over toward next year’s contribution limit - making sure, of course, to lower your ongoing IRA contributions to make room for the excess. However, you’ll have to pay a 6% penalty (via Form 5329) per year on that excess until it’s been absorbed or rectified.
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