IRC 4973: How the 6% Excess Contribution Tax Works

The excess contribution tax is a 6% annual excise tax under Internal Revenue Code Section 4973 on money you put into an IRA, HSA, Coverdell ESA, or other tax-favored account above the year’s contribution limit.¹ The tax is charged every year the excess remains in the account, so a small overage left alone quietly grows into a real bill. The good news is that a correction made before your tax return is due wipes out the penalty for that year entirely.

How the 6% Tax Actually Works

At the end of each tax year, the IRS looks at whether any uncorrected excess is still sitting in the account. If it is, you owe 6% of that amount for that year.¹ Do nothing and you owe another 6% the next year, and again the year after. A $2,000 excess left untouched costs $120 a year, so five years of inaction is $600 in penalties on a $2,000 mistake.

The tax is calculated on the excess amount itself, not on any gains the money produced inside the account. It comes out of your pocket, not the account. It is not deductible, and it gets reported on your personal return.

One built-in limit: the 6% tax for any year cannot exceed 6% of the total value of the account at year-end.¹ If a new IRA opened with a $2,000 excess drops in value to $1,500 by year-end, the tax is capped at $90.

The excess also carries forward. Each year’s excess equals the current year’s overage plus any uncorrected carryover, minus withdrawals and any amount absorbed by unused contribution room in the current year.² Once the excess reaches zero, the recurring tax stops.

Which Accounts and Limits Are Involved

Section 4973 covers the tax-favored accounts where Congress has capped annual contributions:

Traditional and Roth IRAs, including SEP and SIMPLE IRAs
Health savings accounts
Coverdell education savings accounts
Archer medical savings accounts
ABLE accounts

For 2026, the limits that trigger the tax are $7,500 across all your traditional and Roth IRAs combined ($8,600 if you are 50 or older), and your contribution cannot exceed your taxable compensation for the year.³ HSA limits are $4,400 for self-only coverage or $8,750 for family coverage, plus a $1,000 catch-up at age 55 if you are not on Medicare. SEP IRA contributions are capped at 25% of compensation up to $72,000, and SIMPLE IRAs allow $17,000 in employee deferrals with a $4,000 catch-up at 50.⁴ Coverdell ESAs are capped at $2,000 per beneficiary, and the standard 2026 ABLE limit is $20,000.⁵

Every dollar above the applicable limit is an excess contribution and gets taxed at 6% per year until removed or absorbed.

How People End Up With an Excess

Going over the dollar limit is the obvious way, but several less intuitive situations catch people every year.

Roth IRA Income Phase-Outs

This is where most accidental excess contributions come from. Roth eligibility phases out at higher incomes. For 2026, the phase-out begins at $153,000 modified AGI for single filers and $242,000 for married joint filers, with full ineligibility above $168,000 and $252,000 respectively.¹ People contribute early in the year based on expected income, then a year-end bonus, vesting event, or capital gain distribution pushes them over. Part or all of the Roth contribution becomes excess.

Not Enough Earned Income

An IRA contribution requires taxable compensation — wages, salary, or self-employment income.⁶ Investment and rental income don’t count. Contribute $7,500 when you earned $3,000 and the $4,500 gap is excess. Spousal contributions have their own trap: the working spouse can fund a non-working spouse’s IRA, but only up to the lesser of the annual limit or the working spouse’s compensation minus their own contributions.³

HSA Mid-Year Coverage Changes

HSA contributions are prorated if you weren’t covered by a qualifying high-deductible health plan for the full year. Family HDHP coverage for six months means roughly half the annual maximum. Contribute the full year’s amount and the difference is excess. Job changes, plan switches, and mid-year Medicare enrollment all trigger this.

The last-month rule offers an exception: enrolled in an HDHP on December 1, you can contribute as if covered all year. But you must stay in the HDHP through December 31 of the following year. Drop coverage during that 13-month testing period and the extra amount becomes income and carries a separate 10% penalty.⁷

Duplicate or Overlapping Contributions

The IRA limit applies across all your traditional and Roth IRAs combined, not per account.³ Putting $5,000 in a Roth and $5,000 in a traditional IRA the same year puts you $2,500 over. The Coverdell $2,000 cap is per beneficiary across all contributors, so grandparents and parents each contributing $1,500 to the same child’s account creates a $1,000 excess.⁵

Fixing an Excess Before the Filing Deadline

The cleanest fix is pulling the excess out before your return is due, including extensions. For most people that is October 15 of the year after the contribution. Get it done by then and the 6% tax never applies for that contribution year.⁸

A timely correction requires withdrawing two things: the excess contribution itself and the net income attributable (NIA) to that excess, which is the earnings or losses generated while the money sat in the account. If the investment lost value, the NIA can be negative, and you actually withdraw less than you put in.

Your custodian handles the NIA math using a formula in Treasury regulations that multiplies the excess by the ratio of the account’s gain or loss to its adjusted opening balance.⁹ Tell them you need a corrective distribution of an excess contribution and they will calculate it.

The earnings portion is taxable as ordinary income in the year the original contribution was made, not the year you withdraw it. Under SECURE 2.0, the 10% early distribution penalty no longer applies to earnings removed as part of a timely corrective distribution, even if you’re under 59½.⁸ The change applies to determinations made on or after December 29, 2022.

Recharacterization

If the excess is in a Roth IRA because your income was too high, you may be able to recharacterize the contribution as a traditional IRA contribution instead of withdrawing it. Recharacterization is a trustee-to-trustee transfer that treats the contribution as if it had been made to the other type of IRA from the start.¹⁰ The transfer must include the NIA, and the deadline is the same filing due date, including extensions. Recharacterization only works for regular contributions, not Roth conversions, and only if you’re actually eligible to make a traditional IRA contribution.

Fixing an Excess After the Filing Deadline

Once the extended deadline passes, you cannot make the excess disappear for years it was in the account. The 6% tax applies for each of those years. But you can still stop it from recurring.

The simpler route is to withdraw the amount of the excess principal. You do not need to calculate or remove the NIA at this point — just the principal itself. That stops the 6% tax from recurring in future years. If the original contribution was nondeductible (as Roth contributions always are), the withdrawn principal generally is not taxable.

The other route is to absorb the excess with next year’s contribution room. Contribute less than the limit the following year and the unused room soaks up the carryover. If your excess is $1,500 and you contribute only $6,000 against a $7,500 limit, the extra $1,500 of room absorbs the carryover and your cumulative excess drops to zero.² You still owe the 6% tax for every year the excess was on the books, but no new penalties accrue after it is gone.

If you already filed your return without reporting the excess and later discover the mistake, file an amended return with a corrected Form 5329. Write “Filed pursuant to section 301.9100-2” at the top if you’re making the correction within six months of the original due date.⁸

Reporting on Form 5329

Every excess contribution and its 6% tax gets reported on Form 5329, filed with your Form 1040.¹¹ The form has separate sections by account type: Part III for traditional IRAs, Part IV for Roth IRAs, and later parts for HSAs, Coverdell accounts, and ABLE accounts. Each part walks through the prior year’s uncorrected excess, current year contributions, corrective distributions, and any amount absorbed by unused room. The tax owed flows to Schedule 2 of your 1040.

File Form 5329 even when you owe nothing — for example, when a corrective distribution eliminated the excess. The statute of limitations for the IRS to assess the excise tax generally does not start running until you file the form. Skip it and the IRS can come back to assess the penalty years later with no time limit.

1
Office of the Law Revision Counsel. 26 U.S. Code 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
2
Internal Revenue Service. IRA Year-End Reminders
3
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
5
Internal Revenue Service. Topic No. 310, Coverdell Education Savings Accounts
6
Internal Revenue Service. Topic No. 451, Individual Retirement Arrangements (IRAs)
7
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
8
Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
9
eCFR. 26 CFR 1.408-11 – Net Income Calculation for Returned or Recharacterized IRA Contributions
10
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
11
Internal Revenue Service. Instructions for Form 5329