If a taxpayer contributes beyond the limit, what must they do with the excess amount?

When a taxpayer contributes beyond the limit to a tax-advantaged account, such as an Individual Retirement Account (IRA) or a health savings account (HSA), they are required to handle the excess contribution appropriately to avoid penalties. The correct action is to withdraw the excess amount from the account.

This withdrawal must be reported as income for the year in which the contribution was made. This reporting is necessary because contributions that exceed the established limits can incur unnecessary tax penalties and reduce the taxpayer's tax advantage associated with these accounts. By removing the excess amount, the taxpayer can minimize or eliminate these penalties while correctly reflecting their taxable income.

Leaving the excess contribution in the account may result in penalties, and other options, such as donating to charity or investing in stocks, would not address the tax implications tied to exceeding contribution limits. Thus, withdrawing and properly reporting the excess is the compliance measure that ensures the taxpayer adheres to the regulations governing these accounts.