Two Common IRA Errors and How to Correct Them

The right remedies for two common IRA mistakes

Even the most diligent savers can make an IRA mistake. The good news is that many IRA errors can be corrected if you act quickly and follow IRS rules. While some missteps, such as engaging in a prohibited transaction, cannot be undone, others can often be resolved without serious long‑term consequences.

Two of the most common IRA errors involve contributions and distributions. Putting too much into an IRA or failing to take enough out can trigger penalties, but both have well‑defined remedies. Understanding how these corrections work can help you protect your retirement savings and stay compliant.

Putting too much into your IRA

The IRS sets strict annual contribution limits for IRAs. For 2026, the maximum contribution is $7,500, or $8,600 if you are age 50 or older. In addition, eligibility rules apply, particularly for Roth IRAs, where income limits may restrict who can contribute.

An excess contribution occurs when you contribute more than allowed or contribute when you are not eligible. If not corrected, excess contributions are generally subject to a 6% penalty for each year the excess remains in the account. Fortunately, the IRS allows three primary ways to correct the mistake.

• Option 1: Remove the excess before the penalty applies
  To avoid the 6% penalty altogether, you can remove the excess contribution and any earnings attributable to it by your tax return due date, including extensions. If you file your return on time, you automatically have until October 15 to correct.  Any earnings withdrawn must be included in taxable income for the year of the original contribution. However, no 10% early distribution penalty applies, even if you are under age 59½. This is typically the simplest and least costly remedy.
• Option 2: Remove the excess after the penalty applies
  If you miss the October 15 deadline, the 6% penalty applies for that year. At that point, removing the excess is still important because an additional 6% penalty will apply for every year the excess remains in the IRA. Excess contribution penalties are reported on IRS Form 5329, which is filed with your federal tax return and carried to Schedule 2 of Form 1040.
• Option 3: Reallocate the excess to a future year
  If you are eligible to make an IRA contribution in a later year, you can leave the excess in the IRA and treat it as a contribution for that future year. In this case, you still pay the 6% penalty for the original year, but no further penalties apply once the contribution becomes valid.

 

Example: Anna made a $7,000 Roth IRA contribution for 2025. Later, she realized a bonus pushed her income above the Roth eligibility limit. She did not remove the excess by October 15. When filing her 2025 return, Anna paid the $420 penalty and left the money in the account. In 2026, her income fell within the allowable range, so the $7,000 contribution was applied as her 2026 Roth IRA contribution.

Not taking enough out of your IRA

Another common mistake occurs on the distribution side. Once you reach age 73, you must begin taking required minimum distributions from your Traditional IRA. Beneficiaries of inherited IRAs are also generally required to take distributions, even from Roth IRAs. Failing to take a required minimum distribution creates an excess accumulation. The penalty is 25% of the amount not withdrawn, but it can be reduced to 10% if you correct the error within a reasonable time, typically within two years.

 

Example: Peter, age 78, forgot to take his 2025 RMD by December 31. When he discovered the mistake in early 2026, he promptly took the missed distribution. Because he corrected the error within the allowed timeframe and paid the reduced penalty, his penalty dropped from 25% to 10%.

As with excess contributions, excess accumulation penalties are reported on IRS Form 5329. If you believe you missed an RMD for a good reason, you can request a waiver by entering “RC” for reasonable cause on the form and explaining both the reason for the error and how you are fixing it.

When to seek professional help

Many IRA corrections can be handled by carefully following IRS instructions and meeting required deadlines. That said, there are situations where professional guidance can be especially helpful, including when:

• Excess contributions span multiple tax years or involve significant dollar amounts
• You are unsure whether a Traditional IRA contribution is deductible or should instead be reported as nondeductible
• You have inherited an IRA and are unclear about the applicable distribution rules

STRATA does not replace your tax or accounting professionals, but understanding the rules is often the key to resolving IRA issues confidently. Correcting excess contributions or missed required minimum distributions typically comes down to acting within the IRS’s defined timelines and choosing the appropriate remedy. By knowing your options and staying attentive to contribution limits and distribution requirements, you can limit penalties and keep your retirement strategy on track.

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