Put $500 Too Much in an IRA and the IRS Charges 6% Every Year It Stays There. Pull It Out by October 15 and the Penalty Is $0
A small IRA overage can quietly compound into a years-long tax bill, and most savers have no idea there is a legal window to make the whole penalty disappear before it ever applies.
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A $500 slip in an IRA costs $30. Then it costs another $30 the next year, and the year after that, for as long as the extra money stays in the account. Section 4973 of the Internal Revenue Code sets the rule, imposing a 6% excise tax on excess IRA contributions every year that excess remains in your IRA.
The fix costs nothing if you beat the deadline. For 2025 contributions, that deadline is October 15, 2026 (including extension). Below: how the rule works, what the fix costs in real dollars, and what to do if you miss the date.
How a $500 Overage Catches Careful Savers
Consider a sample saver, age 62, who puts $8,500 into her traditional IRA for 2025. She’d read about higher limits and thought they applied to her. They applied to the following year.
For 2025, the IRA limit was $7,000, plus a $1,000 catch-up for savers 50 and over, for a ceiling of $8,000. The $7,500 base limit and $1,100 catch-up apply to 2026, a combined $8,600. Her excess: $500.
Other common triggers include a Roth contribution made when income turns out too high, or a contribution made in a year with no earned income. That second one often catches people in their first full year of retirement.
Section 4973 Bills 6% Every Year the Extra Cash Stays Put
Section 4973 checks your IRA at the end of each tax year. If an excess is still there, you owe 6% of it. You report it on IRS Form 5329: Part III for Traditional IRAs and Part IV for Roth IRAs.
On $500, that’s $30 a year. Leave it for five years and the total hits $150. The tax continues every year until you remove the money.
Pull It Out by October 15 and the Penalty Is $0
Section 408(d)(4) offers the way out. Withdraw the excess plus whatever it earned by your filing deadline, including extensions, and the contribution is treated as though it had never been made. The 6% never applies.
Extension filers have until October 15. So do people who filed on time in April: the IRS gives timely filers six months after the due date for filing the tax return, or by October 15, 2026 or six-month corrective period applies, which also lands on October 15.
Here’s how it works for our saver, assuming her custodian calculates $40 of earnings on the excess:
- She requests her IRA custodian for a “return of excess contribution” for tax year 2025. Using that exact phrase gets the payout coded correctly on Form 1099-R.
- The custodian sends her $540: the $500 excess plus the earnings, called net income attributable (NIA). NIA comes from an IRS formula based on how the whole account performed while the money was in it.
- The $500 comes back tax-free, provided she never deducted it.
- The $40 counts as 2025 income, taxed in the year she made the contribution. In the 22% bracket, that’s about $8.80 in federal tax.
- She already filed her 2025 return, so she files an amended return reporting the $40, with “Filed pursuant to section 301.9100-2” written at the top.
Fixing it costs her under $9. Leaving it for five years costs $150, and the meter keeps running.
Two complications. Savers under 59½ also owe the 10% early-withdrawal penalty on the earnings, which here comes to just $4. And if the account lost value, the NIA can be a loss, so you withdraw less than $500.
Missed October 15? Two Ways to Stop the 2026 Charge
Once the deadline passes, the 6% for 2025 is locked in. File Form 5329 and pay the $30. You can still keep a second year’s bill from landing:
- Withdraw the $500 by December 31, 2026. After the deadline, you remove only the excess itself. The earnings can stay in the account.
- Bear it. Contribute $500 less for 2026 and count the old excess toward this year’s limit. This works only if you have enough earned income to qualify for a 2026 contribution.
State rules differ. Most states with an income tax will also tax the returned earnings, so expect a small line on your state return too.
One Wrong Word Turns a Fix Into a Second Problem
One common mistake is requests for a regular distribution. That leaves the excess sitting in the account on paper, so the 6% keeps applying, and it can add income tax and early-withdrawal penalties on top. Call your custodian, say “return of excess contribution,” name the tax year, and get it done before October 15.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
