How to Calculate the IRS Penalty for Excess IRA and 401(k) Contributions

Key Takeaways

The IRS charges a 6% excise tax on any excess contribution amount, assessed each year the excess remains in the account.
A $1,000 excess left in a Roth IRA for three years costs $180 in penalties, not $60. The tax resets annually.
Withdraw the excess contribution plus its attributable earnings before the tax-filing deadline (including extensions) to eliminate the penalty entirely for that year.
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The 6% Excise Tax Is Not a One-Time Event

The IRS imposes a 6% excise tax on excess contributions under IRC Section 4973. That 6% applies to the excess amount or the account's fair market value at year-end, whichever is smaller. The tax hits every tax year the excess stays in the account. Leave $2,000 over the limit untouched for four years, and you pay the excise tax four separate times on that same $2,000.

The penalty is reported on IRS Form 5329, Part III. It is separate from your regular income tax. It does not disappear because you forget to report it. The IRS can assess it retroactively with interest.

What Counts as an Excess Contribution

Traditional IRA and Roth IRA Limits

For tax year 2025, the IRA contribution limit is $7,000 per person ($8,000 if you are age 50 or older). Excess contributions arise from four situations:

You contributed more than the annual dollar limit.
You contributed more than your taxable compensation for the year.
You contributed to a Roth IRA but your modified adjusted gross income (MAGI) exceeded the phase-out range (beginning at $150,000 for single filers and $236,000 for married filing jointly in 2025).
You contributed to a Traditional IRA and claimed a deduction you were not eligible to take.

401(k) and 403(b) Elective Deferral Limits

The 2025 elective deferral limit for a 401(k) or 403(b) is $23,500 ($31,000 with the age-50 catch-up). Excess deferrals most often occur when someone switches jobs mid-year and contributes to two separate plans without tracking cumulative totals. The combined deferrals across all employers must stay under the single annual limit.

How to Calculate the Penalty: The Core Formula

The excise tax calculation follows a straightforward formula:

Penalty = Excess Contribution Amount x 0.06

Apply this to the lesser of: (a) the excess contribution, or (b) the account's fair market value on December 31 of the tax year.

In nearly all practical cases, the account value exceeds the excess contribution, so the penalty base is simply the excess amount itself.

Worked Example 1: Roth IRA Income Phase-Out

A single filer with a 2025 MAGI of $170,000 contributes the full $7,000 to a Roth IRA in March 2025. The Roth IRA contribution phase-out for single filers runs from $150,000 to $165,000 in 2025. At $170,000 MAGI, this filer is completely ineligible for a Roth IRA contribution.

The entire $7,000 is an excess contribution.

Penalty for 2025: $7,000 x 0.06 = $420

If the filer discovers this in October 2026 while filing an extended return, the excess has now sat through two tax years (2025 and 2026). The filer owes $420 for 2025 and faces another $420 for 2026 unless the excess is withdrawn immediately.

Total penalty exposure: $840, plus ordinary income tax on any earnings attributable to the $7,000 while it sat in the account.

The correct action: the filer should have recharacterized the Roth IRA contribution to a Traditional IRA, or requested a return of excess contribution before the October 15, 2025 extension deadline.

Worked Example 2: Double 401(k) Contribution After a Job Change

An employee maxes out a 401(k) at Employer A with $14,000 in deferrals before leaving in June 2025. They join Employer B and defer another $12,000 by December 2025. Total deferrals: $26,000.

The 2025 limit is $23,500. The excess is $2,500.

Penalty for 2025: $2,500 x 0.06 = $150

This penalty seems small. The real cost is the income tax. The $2,500 excess was excluded from the employee's W-2 at Employer B, but the IRS treats excess deferrals as includible in gross income for the year of deferral. The employee must include $2,500 in 2025 taxable income, pay ordinary income tax on it, and then pay ordinary income tax again when the funds eventually distribute, because the basis tracking for the corrected amount is complicated.

The correct action: notify Employer B's plan administrator by April 15, 2026. The plan can distribute the excess deferral plus earnings by that date. The employee still pays income tax on the $2,500 in 2025, but avoids the double-taxation trap on distribution and eliminates the 6% excise tax entirely.

The Correction Window: Deadlines That Matter

The IRS provides a clean escape from the 6% penalty if you act before the correct deadline.

For IRA excess contributions, withdraw the excess plus net income attributable (NIA) by the tax-filing deadline, including extensions. For a calendar-year filer, that is April 15 of the following year, or October 15 if you file IRS Form 4868. The withdrawn earnings count as ordinary income for the year of contribution, reported on the corrected return.

For 401(k) excess deferrals, notify the plan administrator by March 1 of the following year. The plan must distribute the excess by April 15. The April 15 deadline is fixed. Extensions do not move it.

Miss either deadline, and the 6% excise tax locks in for that year. The excess then carries forward to the next year's calculation, triggering the penalty again.

How to Calculate Net Income Attributable

When you request a return of excess contribution from an IRA, the custodian must also return the earnings that the excess generated. The IRS formula for net income attributable (NIA) is:

NIA = Excess Contribution x ((Adjusted Closing Balance - Adjusted Opening Balance) / Adjusted Opening Balance)

The adjusted opening balance is the account value at the start of the computation period plus any contributions made during it. The adjusted closing balance is the account value at the end of the computation period minus any distributions taken during it. Most custodians calculate this automatically when you submit a return-of-excess request form. Verify the number before accepting it.

Report the Penalty Correctly on IRS Form 5329

IRS Form 5329, Part III calculates the 6% excise tax on excess IRA contributions. Line 17 carries the excess from the prior year (if any). Line 18 accepts any excess contributions made in the current year. Line 20 shows the corrective distributions made by the deadline. The taxable excess flows to line 23, and the 6% penalty appears on line 24.

Attach Form 5329 to IRS Form 1040. If you owe a penalty for a prior year and did not file Form 5329 then, file a standalone Form 5329 for that tax year. The IRS accepts late filings of Form 5329 to establish the penalty amount, though interest accrues from the original due date.

Run the Full Tax Impact Before You Correct

The 6% excise tax is only part of the cost. Depending on your marginal bracket, the earnings distributed from a corrected IRA contribute to your total taxable income for the year. If the IRA is a Roth IRA and you are in the 32% federal bracket, a $700 NIA distribution adds $224 in federal income tax on top of the penalty.

Use the CalcMoney Income Tax Calculator to model the total impact. Enter your current taxable income, add the attributable earnings from the correction, and see the marginal cost before you file. Knowing the exact number lets you determine whether a recharacterization, a return of excess, or an absorption of the 6% penalty is the lowest-cost path for your specific situation.

Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.

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