Individual retirement accounts offer such significant tax benefits that you might want to put in more than you're allowed. Unfortunately, the Internal Revenue Service limits how much you can put in each year. The contribution limit is cumulative for contributions to traditional IRAs and Roth IRAs, so you must account for both types when figuring your excess contributions.Your Roth IRA contribution limit might be lower than your total limit if your income is too high. If you've gone over a contribution limit, you can avoid the 6 percent tax penalty if you withdraw the excess and any associated earnings before your tax filing deadline.
Compare your compensation income for the year to the annual contribution limit and select the lower amount as your total annual contribution limit. For example, in 2012, the annual contribution limit is $5,000 so even if you have $113,000 of income, you're still limited to contributing just $5,000 in total to your traditional and Roth IRAs for the year.
Compare your modified adjusted gross income to the income limits for your filing status if you are making a contribution to a Roth IRA. These limits adjust annually for inflation. If your modified adjusted gross income exceeds the phaseout range, you may not contribute to a Roth IRA. If it falls below the phaseout range, your contribution limit is not affected by your income. If it falls in the phaseout range, you must calculate your maximum Roth IRA contribution.
If you are contributing to a traditional IRA, your contribution limit does not decrease based on your income. However, if you or your spouse has an employer-sponsored retirement plan, your deduction amount may be limited.
Skip to Step 4 if your Roth IRA contribution limit is not affected by your income. Skip to Step 5 if you are only contributing to a traditional IRA.
Calculate your reduced Roth IRA contribution limit if your modified adjusted gross income falls in the phaseout range. Subtract your modified adjusted gross income from the upper end of the phaseout range. Next, divide the result by the size of the phaseout range. Last, multiply the result by your annual contribution limit. For example, assume your modified adjusted gross income is $113,000, the phaseout range runs from $110,000 to $125,000, and your annual contribution is $5,000. First, subtract $113,000 from $125,000 to get $12,000. Next, divide $12,000 by $15,000 to get 0.8. Last, multiply 0.8 by $5,000 to get $4,000 as your maximum Roth IRA contribution.
Subtract your Roth IRA contribution limit from your contributions for the year to figure your excess Roth IRA contribution. For example, if you contributed $5,000 to your Roth IRA and your contribution limit is $4,000, you've got a $1,000 excess contribution. If your Roth IRA contribution does not exceed your Roth IRA limit, you don't have an excess Roth IRA contribution.
Add your traditional IRA contributions to your Roth IRA contributions to figure your total IRA contributions. For example, if you contributed $5,000 to your Roth IRA and $3,000 to your traditional IRA, you've contributed a total of $8,000 to your IRAs.
Subtract your total annual contribution limit from your total IRA contributions to figure your excess IRA contributions. For example, if your limit is $5,000 and you've put in a total of $8,000, your excess contribution equals $3,000.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."