You are detailed about the way you approach your retirement accounts. You are fastidious about savings. But it happens to the best of us—you make a mistake. In this case, you have gone over the contribution limits of your Self-Directed IRA, and you are not sure how to fix it. What can you do to make things right and ensure that you do not pay exorbitant penalties for violating this rule?
Generally, there are two approaches to how you remove excess contributions from an account, and they depend on when you noticed the excess contributions.
What to Do if You Notice the Problem Before Filing a Tax Return
If you have not hit the tax-filing deadline yet, you still have some options. You can withdraw these excess contributions (along with their earnings in your account). Note that you will want to do this so you can include any income with your federal income tax reporting. You may also find that state income taxes may apply, depending on which state you live in.
This helps you avoid the excise taxes associated with this problem, and it’s the simplest way to correct a problem like going over a contribution limit. In this case, you are not lying to anyone—you have simply made an innocent mistake and you are correcting it in an immediate and honest way. It will mean paying some additional taxes, but the sooner you discover the error, the less these will likely be. In fact, you may be surprised to find out you do not owe too much additionally. Just try to avoid making the same mistake twice.
What to Do if You Notice the Problem After Filing a Tax Return
Here’s where it gets a little more complicated. If you notice that you have made excess contributions and you have already filed your taxes, you will still want to withdraw the excess contribution, but you will want to take the additional action of filing an amended return by October 15th. As was the case above, anything you earned on the investments will then be taxable.
What if you have noticed it even later than October 15th? You can then distribute the earnings portion of the investment itself, while then carrying the principle forward to the next year. However, you will want to take diligent note of this, as you will be expected to conform to those contribution limits the next year as well, including what you carried over.
We at American IRA are not tax advisors, so we cannot tell you the specific course of action to take in your situation. But there are some general tips that might help you moving forward:
- Take diligent notes. Whenever something like this happens, make sure to take note of it and keep any relevant forms in your files. Do not throw anything away as it relates to taxes. Instead, buy yourself a file organizer and keep everything by year—this will help you gather everything together when you need to take an action like filing an amended return.
- Set calendar reminders to keep yourself on top of things. Calendar reminders like important tax dates and remembering to check on your contributions before a specific date can help you identify a mistake earlier, which in turn makes your life easier—and full of a lot less paperwork.
With a Self-Directed IRA, you will be responsible for a lot of your own tax issues, which is why it’s always good to enlist the help of a tax advisor in addition to working with a Self-Directed IRA administration firm.