The IRA Mistake That Quietly Costs You 6% a Year

Most people who contribute to an IRA are doing the right thing.

They’re saving.
They’re thinking long term.
They’re trying to take advantage of tax benefits while they still can.

No one contributes to an IRA trying to break a rule—like, no one.

But every year, well-intentioned savers make a small mistake that quietly turns into an ongoing penalty. It’s called an “excess contribution” and the IRS charges six percent per year on the excess amount until it’s corrected.

Not just once. Every single year.

Let’s walk through what that means for you.

What Is an Excess Contribution?

An excess IRA contribution happens when you put in more than you’re allowed—pretty plain and simple.

For 2025, the annual IRA limit is $7,000. If you’re 50 or older, it’s $8,000. That limit applies to the combined total of traditional and Roth IRAs.

An excess contribution can happen in a handful of different ways.

Sometimes someone simply contributes more than the annual limit. Other times, a higher-income earner adds to a Roth IRA without realizing their income is above the allowed phase-out range. It can also happen when someone contributes to both a traditional IRA and a Roth IRA and forgets that the limit applies to both combined.

Even contributing without earned income can create a problem unless you qualify under spousal IRA rules.

The key point is this: even one dollar over the limit counts as an excess. Once that excess sits in the account, the penalty clock starts running—and it’s important to address it immediately.

The Six Percent That Doesn’t Go Away

The IRS charges a six percent excise tax on the excess amount. As mentioned, that penalty repeats every year until the mistake is corrected.

Let’s say someone accidentally contributes $2,000 too much in 2025. If they don’t fix it, they owe $120 for 2025. If it’s still there in 2026, they owe another $120. And it keeps repeating.

The math may not look dramatic. But over time, that “small” mistake compounds into a much, much bigger one.

We should note, too, that’s before you factor in IRS notices, amended returns, and the stress of figuring it out later.

A Realistic PG&E Example

Let’s imagine a PG&E manager earning $250,000 in 2025.

They automatically contributed $7,000 to a Roth IRA in January. It’s part of their routine. They’ve done it before. It feels normal because that’s what they normally do.

What they don’t realize is that their income places them above the Roth IRA eligibility range.

That entire $7,000 is now an excess contribution.

If left uncorrected, they would owe six percent per year on that amount. Over ten years, that’s $420 in penalties alone, not counting administrative hassle.

But here’s the part most people miss: this mistake is easy to fix—if you catch it early.

Why This Happens More Often Than You Think

PG&E employees often have multiple moving parts in their retirement savings.

There’s the 401(k) Retirement Savings Plan. There may be a Roth IRA on the side. Sometimes there’s a traditional IRA as well. Add variable income, bonuses, or stock compensation, and income levels can shift from year to year.

It’s easy to assume that if you were eligible for a Roth contribution last year, you are this year.

But income limits have changed. Earnings fluctuate. And the IRS doesn’t offer grace for your good intentions.

Custodians report IRA contributions directly to the IRS. This isn’t something that just flies under the radar.

What’s worse is most excess contributions aren’t discovered until tax time. By then, you’re already on the clock.

The Three Ways to Fix It

The good news is that an excess contribution can be corrected. The key is acting before the tax filing deadline, including extensions, which is typically October 15 of the following year.

The first option is to withdraw the excess contribution along with any earnings generated from it. The earnings portion may be taxable, and if you’re under 59½, it could be subject to a ten percent early withdrawal penalty. But once removed and reported, the excess is eliminated.

The second option is to re-characterize the contribution. If you contributed to a Roth IRA but later realized you were over the income limit, you may be able to reclassify it as a traditional IRA contribution, assuming you’re otherwise eligible. When done correctly by the deadline, this can fix the problem cleanly.

The third option is to apply the excess toward some future year’s contribution. In this case, you would owe the six percent penalty for the current year, but once it’s absorbed in a future year’s limit, the penalty stops repeating.

The right solution depends on your income, tax situation, and future eligibility.

But doing nothing is clearly never the right solution.

The Five Most Common IRA Mistakes

After years of reviewing tax returns and retirement accounts, I’ve spotted patterns.

The first mistake is assuming Roth contributions are always allowed. High earners often forget that income limits apply.

The second is forgetting that the annual IRA limit applies across both traditional and Roth accounts combined.

The third is contributing without earned income. Unless you qualify under spousal IRA rules, earned income is required.

The fourth is waiting too long to correct the error. Every year you delay, you pay another 6%.

And the fifth is assuming the IRS won’t notice. They will.

None of these mistakes come from bad intentions. They typically stem from complexity.

Why Acting Early Matters

If you discover an excess contribution before filing your tax return, the process is easy. You identify the excess amount, calculate any earnings attributable to it, choose your correction method, and report it properly.

If you discover it after filing, you may need to amend your return and file Form 5329 to account for the excise tax.

The longer it sits, unfortunately the more paperwork and penalties accumulate. Five minutes of review today can prevent years of hassle later.

A Simple Habit That Saves Money

Each year, before making an IRA contribution, pause and ask yourself just two questions.

First, what is my actual income this year, and am I eligible for the type of IRA I’m adding to?

Second, have I already contributed anywhere else that counts toward the same limit?

That simple check eliminates most problems.

For higher-income PG&E employees whose earnings are near the Roth phase-out range, it may make sense to actually wait until tax time to finalize your IRA contributions. That way, you know exactly where your income lands before locking in any contribution.

The Bigger Picture

The reality is that an excess IRA contribution won’t derail your retirement plan.

It’s a signal of something important though: tax rules matter and should be taken seriously.

The IRS doesn’t care if the mistake was innocent. The six percent penalty applies until it’s fixed.

If you’ve contributed to an IRA this year, take a few minutes to verify your eligibility and limits. If something looks off, go ahead and fix it now.

Your future self will appreciate it.

And if you’re not sure whether your contribution is clean, it’s always easier to check it before the IRS does. If you’re looking for help with any of this—give us a call! We’d love to hear from you.