Uh-Oh, Did You Put Money Into a Roth IRA When You Weren’t Allowed To? Here’s What to Do

Oops, You Contributed Too Much to a Roth IRA—Here’s How to Fix It Before the IRS Hits You With a Penalty

Roth IRAs can be great—until you realize you weren’t actually allowed to contribute. If your income was too high last year and you accidentally put money into a Roth IRA, you’ll need to fix it fast to avoid a recurring 6% penalty. Here’s what to do, whether you want to recharacterize the contribution, withdraw the excess, or make sure you’re not paying more taxes than necessary.

If you spend any time reading about personal finance, you’ve probably encountered the widespread enthusiasm for the Roth IRA. It’s one of the most celebrated retirement savings tools, and for good reason. While you get no tax break on contributions upfront, your money grows tax-free. When you withdraw the money during retirement, you’ll pay no taxes on those distributions assuming you’re at least 59 ½ years old and the account has been open for at least five years. 

That’s a compelling benefit, which is why so many people try to take advantage of it.

But what many personal finance articles fail to emphasize is that Roth IRAs come with income limits. If your income is too high, you’re either not allowed to contribute at all, or you can only contribute a reduced amount. And because you don’t actually know what your final income for the year will be until after the year ends, you might contribute to a Roth IRA only to later realize you weren’t eligible—or that you contributed too much.

So, what do you do if that happens? Let’s break it down.

The Catch-22 of Roth IRA Contributions

Contributing to a Roth IRA early in the year is often framed as a smart move. You maximize your time in the market and get your retirement savings locked in. But here’s the problem:

You don’t actually know what your income for the year will be until after the year ends. Sure, you might think you have a good sense of it—after all, your salary is what it is. But what if you get a surprise bonus? What if your spouse gets a raise? What if you get laid off? What if you inherit an IRA and suddenly have taxable required withdrawals?

These unexpected events can push your income beyond the Roth IRA eligibility limits, leaving you in a tricky spot. You might not even realize this has happened until tax time, when you (or your accountant) review your income and contributions.

How Can You Know if you Contributed Too Much?

Your eligibility to contribute to a Roth IRA is based on your modified adjusted gross income (MAGI). I’m not going to get into the technical details of how MAGI is calculated here—your tax software or accountant can tell you what yours is. But the key takeaway is that if your MAGI is above a certain threshold, you’re either limited in how much you can contribute or outright ineligible.

For 2024, for example:

• If you’re married filing jointly and your MAGI is below $230,000, you can contribute up to the limit (which is based on your age). 

• If it’s between $230,000 and $240,000, your contribution limit is reduced.

• If it’s above $240,000, you can’t contribute at all.

(These numbers change each year, so always check current limits.)

If you’ve realized you contributed more than you were allowed, either because your income exceeded the limit entirely or because you contributed more than the reduced amount you were eligible for, you’ll need to fix it.

How to Fix an Excess Roth IRA Contribution

The good news: If you realize your mistake in time, you can correct it without penalty. Here’s how:

Option 1: Recharacterization (Deadline: October 15 of the Following Year)

Recharacterizing your Roth IRA contribution means essentially telling the IRS, “Oops, I didn’t mean for that to be a Roth contribution. Please treat it as a traditional IRA contribution instead.”

To do this, contact your brokerage and request a recharacterization. Many brokerages will calculate the necessary adjustments for you, including any gains (or losses) associated with your contribution. Why? Because you’re not just moving your contribution—you’re moving the entire amount, including any growth.

A Pitfall to Watch For: Make Sure the Money Actually Leaves the Roth IRA

Some brokerage firms (looking at you, Vanguard) have user interfaces that make it easy to think you’ve moved the money out of the Roth IRA when you haven’t. They may require you to sell mutual fund shares first, which converts your investment to cash, but then leave that cash sitting in the Roth IRA instead of actually transferring it to a traditional IRA.

Double-check your account after initiating a recharacterization to make sure the money was actually moved. It’s your responsibility—not your brokerage’s—to make sure this is done correctly.

Option 2: Withdraw the Excess Contribution (Avoiding a Recurring Penalty)

If you missed the recharacterization deadline or simply prefer to remove the excess contribution, you can withdraw it. You’ll need to withdraw both the excess contribution and any earnings associated with it. Depending on your age and circumstances, you may owe taxes and a 10% penalty on the earnings, but this approach at least stops the problem from snowballing.

The 6% Penalty for Excess Contributions

If you don’t fix the excess contribution, the IRS will charge you a 6% penalty on the excess amount every year that it remains in your Roth IRA. This can add up quickly, which is why correcting the mistake as soon as possible is so important.

Can You Deduct a Recharacterized Contribution?

When you recharacterize a Roth IRA contribution, it gets moved into a traditional IRA. But can you deduct that contribution? Maybe.

Traditional IRAs have their own income limits for deductibility, which depend on whether you (or your spouse) are covered by a workplace retirement plan. If your income is too high, your contribution will still be allowed in a traditional IRA, but it will be considered nondeductible—meaning you won’t get an upfront tax break.

If that’s the case, make sure to file Form 8606 with your tax return. This form tracks nondeductible IRA contributions to ensure that when you eventually withdraw the money, you don’t get taxed on it again. Many people neglect this step, which can lead to paying unnecessary taxes later.

Key Takeaways

• You don’t truly know your income until after the year is over. That means Roth IRA contributions made early in the year might later turn out to be ineligible.

• If you contributed too much, you need to fix it. Recharacterizing the contribution into a traditional IRA is the best approach, but withdrawing the excess is also an option.

• Be proactive. If you do nothing, the IRS will hit you with a 6% penalty every year the excess remains in the account.

• If your recharacterized contribution isn’t deductible, file Form 8606. This ensures you won’t pay taxes on that money twice.

Roth IRAs are fantastic savings tools, but only when used correctly. If you realize you’ve made an excess contribution, take action quickly. And if this all feels confusing, well—that’s what financial planners are for.