Eligibility
Applies to individuals who contributed more than the legal limit to an IRA, Roth IRA, HSA, Archer MSA, Coverdell ESA, or ABLE account.
Frequently Asked Questions
Who is eligible for the Correction of Excess Contributions to Tax-Favored Accounts?
Applies to individuals who contributed more than the legal limit to an IRA, Roth IRA, HSA, Archer MSA, Coverdell ESA, or ABLE account.
How does the Correction of Excess Contributions to Tax-Favored Accounts work?
Taxpayers can avoid the 6% excise tax on excess contributions to IRAs, HSAs, and MSAs by distributing the excess amount (plus earnings) before the tax return due date.
What law authorizes the Correction of Excess Contributions to Tax-Favored Accounts?
The Correction of Excess Contributions to Tax-Favored Accounts is authorized under IRC §4973 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §4973
Source: Internal Revenue Code, Title 26, United States Code
§ 4973. Tax on excess contributions to certain tax-favored accounts and annuities(a) Tax imposedIn the case of—(1) an individual retirement account (within the meaning of section 408(a)),
(2) an Archer MSA (within the meaning of section 220(d)),
(3) an individual retirement annuity (within the meaning of section 408(b)), a custodial account treated as an annuity contract under section 403(b)(7)(A) (relating to custodial accounts for regulated investment company stock),
(4) a Coverdell education savings account (as defined in section 530),
(5) a health savings account (within the meaning of section 223(d)), or
(6) an ABLE account (within the meaning of section 529A),
there is imposed for each taxable year a tax in an amount equal to 6 percent of the amount of the excess contributions to such individual’s accounts or annuities (determined as of the close of the taxable year). The amount of such tax for any taxable year shall not exceed 6 percent of the value of the account or annuity (determined as of the close of the taxable year). In the case of an endowment contract described in section 408(b), the tax imposed by this section does not apply to any amount allocable to life, health, accident, or other insurance under such contract. The tax imposed by this subsection shall be paid by such individual.
(b) Excess contributionsFor purposes of this section, in the case of individual retirement accounts or individual retirement annuities, the term “excess contributions” means the sum of—(1) the excess (if any) of—(A) the amount contributed for the taxable year to the accounts or for the annuities (other than a contribution to a Roth IRA or a rollover contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16)), over
(B) the amount allowable as a deduction under section 219 for such contributions, and
(2) the amount determined under this subsection for the preceding taxable year reduced by the sum of—(A) the distributions out of the account for the taxable year which were included in the gross income of the payee under section 408(d)(1),
(B) the distributions out of the account for the taxable year to which section 408(d)(5) applies, and
(C) the excess (if any) of the maximum amount allowable as a deduction under section 219 for the taxable year over the amount contributed (determined without regard to section 219(f)(6)) to the accounts or for the annuities (including the amount contributed to a Roth IRA) for the taxable year.
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