Pay attention to the contribution limits throughout the year and keep track. Image: g0d4ather/Shutterstock.com
By: John GrobeMany of us who write articles on federal retirement are fond of saying that “…there’s no such thing as too much money in the Thrift Savings Plan.” Well, apparently there is such a thing as too much money in an Individual Retirement Arrangement (IRA) and one can be penalized for putting too much money in their IRA.
In 2024 you can contribute $7,000 to an IRA, and another $1,000 if you are 50 or over (this includes the year in which you turn 50). If you contribute more than this amount, it is considered an “excess contribution” and has a 6% excess contribution penalty associated with it.
We know that the TSP limits our contributions, not allowing us to contribute more than the annual elective deferral amount (for 2024 it’s $23,000 and an additional $7,500 for the 50 and over crowd as with IRAs, this includes those who turn 50 during the year).
Each IRA will hold you to the limits listed in the second paragraph above, but it’s not out of the realm of possibility that, if you have more than one IRA, you might exceed the contribution level.
Some common causes of excess contributions are:
• Contributing to more than one IRA. For example, making a full contribution to both a traditional and a Roth IRA.
• Not keeping track of your contributions and putting in an amount over the annual limit.
• For the well compensated, exceeding the Roth IRA phase-out limits.
The 2024 Roth phase-out limits are:
Single filing status
Full contribution allowed if income is below $146,000
Partial contribution allowed if income is between $146,000 and $161,000
No contribution allowed if income is over $161,000Joint filing status
Full contribution allowed if income is below $230,000
Partial contribution allowed if income is between $230,000 and $240,000
No contribution allowed if income is over $240,000
• Rolling over ineligible dollars (e.g., required minimum distributions, etc.).
You are allowed to correct an excess contribution and not be penalized if you do it by October 15th of the tax year after the excess contribution was made. If you made an excess contribution in 2024, October 15, 2025, would be the deadline for correcting it.
When correcting an excess contribution, you must not only remove the contribution, but also the net income attributable (i.e., earnings) to the excess contribution.
Strangely, if you miss the October 15th date and are assessed the penalty, you need to remove only the excess contributions, not the net income attributable, to avoid future penalties.
The penalty applies to each year that the excess contribution remains in the account as of December 31st.
Sound confusing? Of course it does – it’s the tax law.
The easiest way to escape the penalty on excess contributions is to not make any. Pay attention to the contribution limits throughout the year.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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