In addition to pumpkins and trick-or-treats, October closes the window on the prior tax year for most filing purposes. October 15 is typically your last chance to file your tax return or make changes to the tax treatment of your IRA contributions for the previous year. If you contributed too much to your self-directed IRA for 2021, or you changed your mind about the tax treatment of your contribution, you still have a bit of time left to fix it.

If you file your tax return timely, which includes filing under an extension, you automatically have until October 15 to correct IRA excess contributions and to recharacterize a current-year IRA contribution. Because October 15, 2022, falls on a Saturday, the deadline this year is the next business day – October 17, 2022.

Correcting Excess Contributions

An IRA excess for 2021 will occur for any of the following situations:

• • If you contributed more than $6,000 to your Traditional and Roth IRAs in aggregate ($7,000 if you’re 50 or older) 
  • If you contributed more to your IRAs than you earned 
  • If you completed more than one IRA-to-IRA rollover in a 12-month period 
  • If you deposited an indirect rollover after the 60-day deadline
  • If  you had “modified adjusted gross income” that exceeded the income limit for contributing to a Roth IRA

If you have an excess contribution in your IRA for 2021 and correct it by October 17, 2022, you can avoid paying a 6% excess contribution tax for each year the excess remains in your IRA. If you correct an excess contribution after you’ve already filed your 2021 tax return, you may need to file an amended return.

You have two options for adjusting your 2021 IRA contribution:

Option 1 – Withdrawal

You can correct a 2021 excess contribution by withdrawing it from your IRA, along with any investment earnings associated with the excess amount, by October 17, 2022. You will not owe tax on the excess you remove, but any earnings withdrawn must be included in your taxable income and are subject to the 10% early distribution tax if you are under age 59½. 

Option 2 – Recharacterize

If your excess was caused by not being eligible to contribute to a Roth IRA, or you have simply changed your mind about the type of IRA contribution you want to make for 2021, you can recharacterize your contribution to the other type of IRA. For example, if you contributed to a Roth IRA, you could treat that contribution as if it were made to your Traditional IRA by requesting a recharacterization and transfer from your IRA custodian. Any investment earnings related to the excess must also be moved to the other type of IRA. This is only an option if you are eligible to contribute to the other type of IRA. There are no tax consequences for a recharacterization; however, you must follow the tax rules for the type of IRA that receives the recharacterized contribution. For example, you cannot take a deduction for an IRA contribution that you recharacterize to a Roth IRA. 

Deadline Extension for Certain Disaster Victims

The IRS has extended tax-related deadlines for victims of certain natural disasters in 2022, including filing deadlines and the deadline for correcting excess IRA contributions. Those eligible for relief include those who live or work in the disaster area, those whose records necessary to meet a tax deadline are in the covered disaster area, relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area, and those who were visiting the covered disaster area and were injured or killed as a result of the disaster.

• • Victims of the water crisis in Mississippi have until February 15, 2023, to complete tax acts due between August 30 and February 15. 
  • Victims of Kentucky severe storms have until November 15, 2022, to complete tax acts due between July 26 and November 15.
  • Victims of Missouri severe storms and flooding have until November 15, 2022, to complete tax acts due between July 25 and November 15.
  • Victims of water shortage and sargassum seagrass influx on the island of St. Croix, U.S. Virgin Islands have until November 15, 2022, to complete tax acts due between July 25 and November 15.
  • Victims of Arizona severe storms occurring between July 17 and 18, have until November 15, 2022, to complete tax acts due between July 17 and November 15. 

More information and a current list of eligible localities are available on the disaster relief page on the IRS website.

Next Steps

Learn more about withdrawing from your IRA and recharacterizing contributions in our FAQs. STRATA offers streamlined online document processing with ServiceNOW, which allows account holders to electronically sign and securely transmit service requests directly to our team in just a few easy steps.

If you have questions about your IRA or need help calculating the earnings attributable to an excess contribution, please contact our self-directed IRA experts.