Who will notify or let me know when I over contribute IRA?

[Jason18]

Hi everyone,

Suppose that I contribute $4,000 to my IRA for this year. But for some reason, I'm only allowed to contribute $3,000. So my excess contribution is $1,000.

Here are my questions:

1/ Who will notify or let me know that I have an excess contribution? (IRS or the online broker that I opened my IRA account ?)

2/ How long will it take to receive a notification of excess contribution after the day I put money into my IRA account?

Thank you.

[dmertz · Accepted solution]

Generally, no one will inform you of the excess contribution until it's too late to avoid one or more year's worth of excess contribution penalties.

Except in the case where you are ineligible to make a traditional IRA contribution due to you age, your broker has no way to know whether or not you are eligible to make an IRA contribution or whether or not you are eligible for a deduction for the contribution.  If you make an excess contribution and do not correct it, the IRS may or may not detect it after processing the Form 5498 sent to you and to the IRS by the account custodian, generally well after you file your tax return.  If the IRS doesn't detect it until later, you can end up with many year's worth of excess-contribution penalties and interest due.  However, if you enter everything into TurboTax correctly, TurboTax will inform you of the excess contribution and, as long as you do this before the due date of your tax return, you'll have time to obtain a return of excess contribution before you are stuck with an excess-contribution penalty.

If you attempt to contribute more than the maximum limit to a particular IRA account (for 2017, $5,500 if under age 50, $6,500 if age 50 or over), the account custodian will often reject the contribution, but the custodian has no obligation to do so.

In summary, responsibility for avoiding or detecting and correcting an excess contribution lies with you personally.

[Jason18]

Hi dmertz,
thank you for taking your time to answer my question.

In your answer, you say that if I enter everything into TurboTax correctly, TurboTax will inform me of the excess contribution.
So can you say more about that? What should I enter into TurboTax so that it will inform me whenever I have an excess of contribution? Does it ask me about how much I contribute to IRA?

Thank you very much.

[dmertz]

Yes, you'll enter the amount of your IRA contributions for the year.  When preparing your tax return with TurboTax, you'll also enter your birthdate, Forms W-2, Schedules C, F, or K-1 (establishing your compensation), other items of income used to determine your modified AGI, any excess contributions that you might have carried into the current year from the previous year.  TurboTax will use all of this information to determine if you have an excess contribution and, if you do, prepare Form 5329 to report the excess contribution unless to take the necessary steps to resolve the excess and indicate to TurboTax that you have done so.  If your obtain a return of excess contribution and indicate this to TurboTax, TurboTax will also prompt you to prepare the necessary explanation statement with regard to the return of excess contribution.

For eligible traditional IRA contributions, TurboTax will also determine if you are eligible for a deduction for the contribution or if your tax return needs to include Form 8606 as required to report the nondeductible contribution.

If your income is in the range where your IRA contribution might qualify you for the Retirement Savings Contributions Credit, TurboTax will take you through the questions necessary to determine if you qualify for any amount of this tax credit.