Over the last few months, several of you have asked questions about what happens when a client makes an excess contribution to a retirement account—and, more importantly, how to fix it.
For 2026, the general IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution for those age 50 and older. These limits apply to both Traditional and Roth IRAs.
There are also income limitations that can affect whether a client can make a Roth IRA contribution or deduct a Traditional IRA contribution. For 2026, the Roth IRA income phase-out begins at $242,000 for married couples filing jointly and $153,000 for single filers.
Traditional IRA deductions have additional limitations if the client—or their spouse—is covered by a retirement plan at work. For example, the deduction begins to phase out at $129,000 of income for married couples filing jointly and $81,000 for single filers.
Now let's look at 401(k) contributions.
For 2026, the employee contribution limit is $24,500. Those age 50–59 can make an additional $8,000 catch-up contribution, while those ages 60–63 can make an additional $11,250 catch-up contribution. The higher catch-up provision for ages 60–63 is temporary and is scheduled to end after 2028.
There are also new rules regarding where certain catch-up contributions must go. If the employee's prior-year wages exceed $150,000, the catch-up contribution generally must be made as a Roth contribution, meaning there is no current-year tax deduction.
So What Happens When You Contribute Too Much?
With those basic limits in mind, let's talk about what happens when a client contributes more than they are allowed to.
Anything above the allowable contribution is considered an excess contribution.
For example, suppose you open an IRA for a rollover, but the client accidentally sends you a personal check instead of a properly designated rollover check. That could result in an excess contribution.
Excess IRA contributions are subject to a 6% excise tax for each year the excess remains in the account.
Here's where things can get particularly painful.
Suppose a client accidentally contributes $250,000 to an IRA when that amount should have been treated as a rollover. The account grows to $300,000 before the mistake is discovered. To correct the problem, the entire $300,000 generally needs to come out of the IRA.
The original $250,000 excess is subject to the 6% excise tax, while the $50,000 of earnings is generally subject to ordinary income tax. The earnings themselves are not subject to the 6% excess-contribution tax. Depending on the client's age and circumstances, the earnings may also be subject to the 10% early-distribution penalty.
How Do You Fix It?
Form 5329 is used to report the excess contribution and calculate the applicable excise tax.
The good news is that there is a way to correct the problem and potentially avoid the 6% excise tax.
If the excess contribution and associated earnings are removed by the applicable tax-filing deadline, including extensions, the 6% penalty can generally be avoided. The earnings will still generally be taxable, and the 10% early-distribution penalty may still apply depending on the client's circumstances.
If you don't discover the problem until after the applicable deadline, the 6% excise tax generally cannot be avoided for that year.
The Takeaway
This is one of those situations where a little extra attention on the front end can prevent a very expensive problem later.
Make sure the IRA application matches the type of money being deposited. If it is a rollover, make sure it is being processed as a rollover. If it is a contribution, make sure the client is eligible to make that contribution.
And don't stop there.
When the account is opened and the money is deposited, verify that everything was actually processed the way it was intended. Check the account, the paperwork, and the funding.
A few minutes of verification can save your client—and your practice—a significant amount of time, money, and frustration later.
