Requesting an IRA excess removal: Common questions
Can I withhold taxes from my excess removal?
Typically, only a portion of your excess contribution is taxable when removed.
If you remove your excess contribution plus earnings before either the April 15 or October 15 (if applicable) deadline, the earnings are taxed as ordinary income – you can withhold taxes from the earnings portion of the removal*.
Note: Per our written request policy, if the excess contribution is removed via DocuSign from your Vanguard Brokerage Account any withholding will be distributed from your Vanguard Federal Money Market settlement fund.
If you remove your excess contribution after the April 15 or October 15 deadline (if applicable) the earnings are not removed and you cannot withhold taxes from this removal*.
*Regardless of your tax withholding election, you may be subject to taxes and penalties when you remove your excess contribution.
What can I do with the excess contribution, once removed?
Your excess contribution removal options depend on your account platform.
When removed from your Vanguard mutual fund only account:
- Exchange your excess contribution to your mutual fund only non-retirement account.**
- Receive your excess contribution as a check.
- Redeposit your excess contribution as a current year contribution – available when removing a prior tax year excess contribution, current year contribution subject to contribution limits.
Note: Excess contributions removed from mutual fund only accounts cannot be sent directly to a bank.
When removed from your Vanguard Brokerage Account:
- Exchange your excess contribution, in-kind, to your Vanguard Brokerage Account non-retirement account.**
- Receive your excess contribution as a check or as an electronic bank transfer (EBT).***
***Per our written request policy, if you remove your excess contribution via DocuSign and you elect to receive a check or an electronic bank transfer (EBT) the removal is withdrawn from your Vanguard Federal Money Market settlement fund.
What if my excess contribution did not occur at Vanguard?
If the excess contribution did not occurred at Vanguard, you should coordinate with the previous institution obtain an earnings statement for the time before the contribution was transferred to Vanguard. Alternatively, you can self-calculate the earnings (or losses) —you may wish to consult a tax advisor.
Once obtained, you will use the information to complete the IRA and ESA Excess Contribution Removal Form.
In the same section you will be asked for the “contribution date”. In this section, the “contribution date” is the date the assets settled into you Vanguard account, not the date(s) of the contribution(s) made at the other firm(s).
How are the excess contribution earnings calculated?
If your excess contribution is removed by your tax filing deadline, plus extensions, the proportional earnings (gains) or losses are also removed. Vanguard has adopted the method set forth in IRS Notice 2000-39 and Proposed Regulations 1.408-11 to calculate these earnings or losses.
The calculations are based on ALL assets in your IRA plan, not just the fund contributed to. For partial excess removals, the latest contribution(s) are removed first and are used in the calculation.
Additional information and examples can be found in the IRS Publication 590-A, Contribution to IRAs.