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IRS.gov Website
Publication 590-A
taxmap/pubs/p590a-010.htm#en_us_publink1000230854

What Acts Result in Penalties or Additional Taxes?(p33)

rule
The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you don’t follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.
There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.
This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you don’t avoid those acts.
taxmap/pubs/p590a-010.htm#en_us_publink1000230855

Prohibited Transactions(p34)

rule
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are some examples of prohibited transactions with a traditional IRA.
EIC
If your IRA is invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased.
taxmap/pubs/p590a-010.htm#en_us_publink1000230856

Fiduciary.(p34)

rule
For these purposes, a fiduciary includes anyone who does any of the following.
taxmap/pubs/p590a-010.htm#en_us_publink1000230857

Effect on an IRA account.(p34)

rule
Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.
taxmap/pubs/p590a-010.htm#en_us_publink1000230858

Effect on you or your beneficiary.(p34)

rule
If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable in Pub. 590-B. The distribution may be subject to additional taxes or penalties.
taxmap/pubs/p590a-010.htm#en_us_publink1000230860
Borrowing on an annuity contract.(p34)
If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.
taxmap/pubs/p590a-010.htm#en_us_publink1000230861
Pledging an account as security.(p34)
If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.
taxmap/pubs/p590a-010.htm#en_us_publink1000230862

Trust account set up by an employer or an employee association.(p34)

rule
Your account or annuity doesn’t lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.
taxmap/pubs/p590a-010.htm#en_us_publink1000230863
Owner participation.(p34)
If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA.
taxmap/pubs/p590a-010.htm#en_us_publink1000230864

Taxes on prohibited transactions.(p34)

rule
If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction isn’t corrected.
taxmap/pubs/p590a-010.htm#en_us_publink1000230865
Loss of IRA status.(p34)
If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary aren’t liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary, earlier.
taxmap/pubs/p590a-010.htm#en_us_publink1000230867

Exempt Transactions(p34)

rule
The following two types of transactions aren’t prohibited transactions if they meet the requirements that follow.
taxmap/pubs/p590a-010.htm#en_us_publink1000230868

Payments of cash, property, or other consideration.(p34)

rule
Even if a sponsor makes payments to you or your family, there is no prohibited transaction if all three of the following requirements are met.
  1. The payments are for establishing a traditional IRA or for making additional contributions to it.
  2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries.
  3. During the year, the total fair market value of the payments you receive isn’t more than:
    1. $10 for IRA deposits of less than $5,000, or
    2. $20 for IRA deposits of $5,000 or more.
If the consideration is group term life insurance, requirements (1) and (3) don’t apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA.
taxmap/pubs/p590a-010.htm#en_us_publink1000230869

Services received at reduced or no cost.(p34)

rule
Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met.
taxmap/pubs/p590a-010.htm#en_us_publink1000230870

Investment in Collectibles(p35)

rule
If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.
Any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, aren’t included in your income when the collectible is actually distributed from your IRA.
taxmap/pubs/p590a-010.htm#en_us_publink1000230871

Collectibles.(p35)

rule
These include:
taxmap/pubs/p590a-010.htm#en_us_publink1000230872
Exception.(p35)
Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
taxmap/pubs/p590a-010.htm#en_us_publink100076117

Unrelated Business Income(p35)

rule
An IRA is subject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or business means any trade or business regularly carried on by the IRA or by a partnership of which it is a member. If the IRA has $1,000 or more of unrelated trade or business gross income, the IRA trustee is required to file a Form 990-T, Exempt Organization Business Income Tax Return. The Form 990-T must be filed by the 15th day of the 4th month after the end of the IRA’s tax year. See Pub. 598, Tax on Unrelated Business Income of Exempt Organizations, for more information.
taxmap/pubs/p590a-010.htm#en_us_publink1000230873

Excess Contributions(p35)

rule
Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:
The taxable compensation limit applies whether your contributions are deductible or nondeductible.
Contributions for the year you reach age 701/2 and any later year are also excess contributions.
An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see chapter 2 of Pub. 560.
taxmap/pubs/p590a-010.htm#en_us_publink1000230875

Tax on Excess Contributions(p35)

rule
In general, if the excess contributions for a year aren’t withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of your tax year.
The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes, later.
taxmap/pubs/p590a-010.htm#en_us_publink1000230877

Example.(p35)

For 2017, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $6,000 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($6,000 minus the $5,500 limit). The contribution earned $5 interest in 2017 and $6 interest in 2018 before the due date of the return, including extensions. He doesn’t withdraw the $500 or the interest it earned by the due date of his return, including extensions.
Paul figures his additional tax for 2017 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by 0.06, giving him an additional tax liability of $30. He enters the tax on Form 5329, line 17, and on Form 1040, line 59. See Paul's filled-in Form 5329, later.
taxmap/pubs/p590a-010.htm#en_us_publink1000230879

Excess Contributions Withdrawn by Due Date of Return(p35)

rule
You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.
taxmap/pubs/p590a-010.htm#en_us_publink1000230880

How to treat withdrawn contributions.(p36)

rule
Don’t include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both of the following conditions are met. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.
In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3.
If you timely filed your 2017 tax return without withdrawing a contribution that you made in 2017, you can still have the contribution returned to you within 6 months of the due date of your 2017 tax return, excluding extensions. If you do, file an amended return with "Filed pursuant to section 301.9100-2" written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).
taxmap/pubs/p590a-010.htm#en_us_publink1000230881

How to treat withdrawn interest or other income.(p36)

rule
You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B.
taxmap/pubs/p590a-010.htm#en_us_publink1000230882

Form 1099-R.(p36)

rule
You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.
taxmap/pubs/p590a-010.htm#en_us_publink1000230883

Example.(p36)

Maria, age 35, made an excess contribution in 2017 of $1,000, which she withdrew by April 17, 2018, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2017 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she isn’t yet 591/2 years old), but she doesn’t have to report the excess contribution as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2017.
taxmap/pubs/p590a-010.htm#en_us_publink1000230878
taxmap/pubs/p590a-010.htm#en_us_publink1000230884

Excess Contributions Withdrawn After Due Date of Return(p38)

rule
In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.
taxmap/pubs/p590a-010.htm#en_us_publink1000230885

Excess contribution deducted in an earlier year.(p38)

rule
If you deducted an excess contribution in an earlier year for which the total contributions weren’t more than the maximum deductible amount for that year (see the following table), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040X for that year and don’t deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, whichever is later.
Year(s)Contribution LimitContribution limit if age 50 or older at the end of the year
2013 through 2016$5,500$6,500
2008 through 2012$5,000$6,000
2006 or 2007$4,000$5,000
2005$4,000$4,500
2002 through 2004$3,000$3,500
1997 through 2001$2,000
before 1997$2,250
taxmap/pubs/p590a-010.htm#en_us_publink1000230886

Excess due to incorrect rollover information.(p38)

rule
If an excess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Don’t include in your gross income the part of the excess contribution caused by the incorrect information.
taxmap/pubs/p590a-010.htm#en_us_publink1000230887

Deducting an Excess Contribution in a Later Year(p38)

rule
You can’t apply an excess contribution to an earlier year even if you contributed less than the maximum amount allowable for the earlier year. However, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year.
You can deduct excess contributions for previous years that are still in your traditional IRA. The amount you can deduct this year is the lesser of the following two amounts.
This method lets you avoid making a withdrawal. It doesn’t, however, let you avoid the 6% tax on any excess contributions remaining at the end of a tax year.
To figure the amount of excess contributions for previous years that you can deduct this year, see Worksheet 1-6.

taxmap/pubs/p590a-010.htm#en_us_publink1000230888
Worksheet 1-6. Excess Contributions Deductible This Year
Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.
1.Maximum IRA deduction for the current year1.
2.IRA contributions for the current year2.
3.Subtract line 2 from line 1. If zero or less, enter -0-3.
4.Excess contributions in IRA at beginning of year4.
5.Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year 5.
taxmap/pubs/p590a-010.htm#en_us_publink1000230890

Example.(p38)

Teri was entitled to contribute to her traditional IRA and deduct $1,000 in 2016 and $1,500 in 2017 (the amounts of her taxable compensation for these years). For 2016, she actually contributed $1,400 but could deduct only $1,000. In 2016, $400 is an excess contribution subject to the 6% tax. However, she wouldn’t have to pay the 6% tax if she withdrew the excess (including any earnings) before the due date of her 2016 return. Because Teri didn’t withdraw the excess, she owes excise tax of $24 for 2016. To avoid the excise tax for 2017, she can correct the $400 excess amount from 2016 in 2017 if her actual contributions are only $1,100 for 2017 (the allowable deductible contribution of $1,500 minus the $400 excess from 2016 she wants to treat as a deductible contribution in 2017). Teri can deduct $1,500 in 2017 (the $1,100 actually contributed plus the $400 excess contribution from 2016). This is shown on Worksheet 1-6. Example—Illustrated.

taxmap/pubs/p590a-010.htm#en_us_publink1000230891
Worksheet 1-6. Example—Illustrated
Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.
1.Maximum IRA deduction for the current year1.1,500
2.IRA contributions for the current year2.1,100
3.Subtract line 2 from line 1. If zero or less, enter -0-3.400
4.Excess contributions in IRA at beginning of year4.400
5.Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year 5.400
taxmap/pubs/p590a-010.htm#en_us_publink1000230893

Closed tax year.(p39)

rule
A special rule applies if you incorrectly deducted part of the excess contribution in a closed tax year (one for which the period to assess a tax deficiency has expired). The amount allowable as a traditional IRA deduction for a later correction year (the year you contribute less than the allowable amount) must be reduced by the amount of the excess contribution deducted in the closed year.
To figure the amount of excess contributions for previous years that you can deduct this year if you incorrectly deducted part of the excess contribution in a closed tax year, see Worksheet 1-7. taxmap/pubs/p590a-010.htm#en_us_publink1000230894
Worksheet 1-7. Excess Contributions Deductible This Year if Any Were Deducted in a Closed Tax Year
Use this worksheet to figure the amount of excess contributions for prior years that you can deduct this year if you incorrectly deducted excess contributions in a closed tax year.
1.Maximum IRA deduction for the current year1.
2.IRA contributions for the current year2.
3.If line 2 is less than line 1, enter any excess contributions that were deducted in a closed tax year. Otherwise, enter -0-3.
4.Subtract line 3 from line 14.
5.Subtract line 2 from line 4. If zero or less, enter -0-5.
6.Excess contributions in IRA at beginning of year6.
7.Enter the lesser of line 5 or line 6. This is the amount of excess contributions for previous years that you can deduct this year 7.
taxmap/pubs/p590a-010.htm#en_us_publink1000230951

Reporting Additional Taxes(p39)

rule
Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you can’t use Form 1040A, Form 1040EZ, or Form 1040NR-EZ.
taxmap/pubs/p590a-010.htm#en_us_publink1000230952

Filing a tax return.(p39)

rule
If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040 or Form 1040NR. Enter the total additional taxes due on Form 1040, line 59, or on Form 1040NR, line 57.
taxmap/pubs/p590a-010.htm#en_us_publink1000230953

Not filing a tax return.(p39)

rule
If you don’t have to file a return, but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed Form 1040 or Form 1040NR. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but don’t attach, a check or money order payable to "United States Treasury" for the tax you owe, as shown on Form 5329. Write your social security number and "2017 Form 5329" on your check or money order.
taxmap/pubs/p590a-010.htm#en_us_publink1000230954
Form 5329 not required.(p39)
You don’t have to use Form 5329 if either of the following situations exists.