You have three options for fixing the problem. You can take the extra money back, you can bump it over to the following year, or you can transfer the excess to a traditional IRA.

Understanding Roth IRAs

Unlike traditional IRAs, you can’t claim a tax deduction for contributions you make to a Roth IRA. Contributions are made with after-tax dollars, but you’ll gain some benefit in exchange for this. You can take distributions tax-free in most cases. You’ve already paid taxes on your contributions. Earnings are tax-free as well, subject to certain rules. You won’t have to take required minimum distributions (RMDs) as you would with a traditional IRA. You can leave your money in a Roth IRA as long as you like.

Roth IRA Contribution Limits

Most people can contribute up to $6,000 to a Roth IRA account in tax year 2022. You can make an additional catchup contribution of $1,000 a year, for a total of $7,000, if you’re age 50 or older. Contributions can be reduced depending on your modified adjusted gross income (MAGI) and your filing status. These limits increase periodically to keep pace with inflation. As of tax year 2022, you can contribute the full $6,000, or $7,000 if you’re age 50 or older, in tax year 2022 if your AGI is:

Less than $204,000 if you’re married and file a joint return with your spouse Less than $129,000 if you’re single, qualify for the head of household filing status, or you’re married file separately but didn’t live with your spouse

Contribution limits begin decreasing when these income thresholds are met. They reach zero at incomes of $214,000 for married filers of joint returns in tax year 2022; and $144,000 for single, head of household, and married filers of separate returns who didn’t live with their spouses. There’s a phaseout for married filers of separate returns who lived with their spouses if they earned less than $10,000. Their contribution limit is zero if their AGIs are $10,000 or more and remains the same in 2022.

Going Over the Limit

Let’s say Sarah is 45 years old. The $6,000 annual limit applies to her because she’s not yet 50. She decides to contribute $600 each month for 10 months from March through December, so she’s maxed out her Roth IRA contributions by the end of the year. Then, as she’s working on her tax return the following spring, Sarah realizes that Roth IRA contributions are also limited based on income, something she was unaware of at the time she was making contributions. As a single person, her maximum Roth IRA limit begins decreasing when her modified adjusted gross income (MAGI) exceeds $129,000. She becomes ineligible to contribute at $144,000 as of 2022. It turns out that Sarah’s MAGI for the year is $135,000. This falls between the starting point and the ending point of the income range where Roth IRA contributions are phased out. They’re eventually eliminated entirely. Sarah’s $6,000 contribution was actually more than what she was allowed to contribute based on her income. Sarah has three options to fix this.

How To Withdraw the Excess Contribution

A withdrawal is the removal of assets from a retirement account, so the amount withdrawn doesn’t count toward a person’s contributions for that particular tax year. According to the IRS, you can withdraw contributions on or before the due date for filing your tax return. This falls on Monday, April 18 in 2022. But you can withdraw contributions from a Roth IRA until the October 17 extended deadline if you’ve requested an extension of time to file your tax return. Withdrawals aren’t treated as distributions. They’re like an “undo” function. It’s as though the contribution was never made in the first place. You must withdraw any earnings along with the underlying principal if the money you contributed produced any interest or dividends while it was sitting in the Roth IRA. The total amount of your withdrawal would be $1,010 if you’re withdrawing $1,000 and that $1,000 earned $10 in interest—your original contribution plus the earnings on that amount.

If You’ve Already Filed Your Tax Return

There’s a special rule that lets you withdraw contributions until October 17, even if you don’t file for an extension. You can withdraw some or all of your Roth IRA contributions up to six months after the original due date of your return. This would be October 17 for most people. You must then file an amended federal tax return after withdrawing the funds from your Roth IRA. You might need to amend your state tax return as well. Check with a local tax professional to be sure.

Move the Contribution to the Next Tax Year

The IRS also lets you apply any contributions that are over the limit toward the following year. Let’s say Robert has to withdraw $1,000 of his Roth IRA contributions because he’s over the limit based on his income. He can simultaneously withdraw $1,000 from his contributions for tax year 2022 and contribute the same $1,000 for tax year 2023. The withdrawal and re-contribution are combined into one action. The IRS says that you can apply the excess contribution in one year to a later year as long as the total contributions for that later year are less than the contribution limit for the year.

Move the Money to a Traditional IRA

Moving the money over to a traditional IRA is referred to as “recharacterizing” a contribution. You’re changing its character from a Roth contribution to a traditional IRA contribution. You can recharacterize IRA contributions up until the due date of your tax return, including extensions. According to the IRS, you must have the contribution transferred from the IRA to which it was made into the second IRA in a trustee-to-trustee transfer. You can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA if the transfer is made by the due date for your tax return for the tax year during which the contribution was made. This includes extensions. The IRS says that you must also include any earnings. You must report the recharacterization on your tax return. You must treat the contribution as having been made on the date it was made to the first IRA.

If You Do Nothing

If you don’t do anything about your excess IRA contributions, you’ll owe a tax of 6% as of 2022. This penalty is called an excise tax. The tax applies to the amount of your contribution that exceeds your limit for the year. It’s reported on Form 5329. You might think that 6% doesn’t sound like too much. Maybe you should just leave the money parked in the Roth IRA if the funds can grow faster than that over time. A 6% “fine” wouldn’t be too great if it was just a one-time tax hit. But that’s not the case. The 6% excise tax kicks in every year that the excess contributions remain in your IRA.

Paying the Tax

Alicia contributed $6,000 to her Roth IRA. But her actual maximum limit was $1,600. Alicia contributed $4,400 more to her Roth IRA than she was permitted. She didn’t correct the excess contribution by October 17. Alicia owes a 6% excise tax on her excess contribution, which is $264. She discovers the error the following spring when she’s working on her taxes. She’s eligible to contribute $2,200 to her Roth IRA for this new year, so she decides not to make any additional Roth contributions. In this situation, $2,200 of her $4,400 in excess contributions is carried over and absorbed into the new year. Her new excess amount drops to $2,200 with a corresponding excise tax of $132. In this scenario, Alicia would pay $396 in excise tax over two years. The excess contribution will have been corrected by not contributing any new savings to her Roth IRA. The excess contribution has been fixed by the third year. No additional excise tax would be paid to the IRS.