How to Calculate IRA Earnings

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Investors always want to know how well their investments are performing. Calculating the earnings on your individual retirement account (IRA) is as simple as looking at the difference between what you contributed and the existing value. However, investors concerned with removing excess contributions from IRA accounts will need to establish the amount the excess contribution has earned while in account. The IRS penalizes excess contributions with a 6 percent tax compounded annually for every year that the excess remains in the account.

Things You'll Need

  • Form 5498
  • Current IRA statement
  • Pencil
  • Paper
  • Calculator
  • Read Form 5498, which is sent by the IRA custodian to you and records with the amount you contributed into the IRA. IRS regulations as of 2010 allow contributions up to $5,000 of earned income, or $6,000 if you are over the age of 50. Anything above these limits is an excess contribution.

  • Write down the amount of the excess contribution. For this example, assume that you contributed an excess $1,000.

  • Calculate the percentage of your over contribution: $1,000 / $5,000 = .20. This is a 20 percent over contribution.

  • Call the IRA custodian on the number located on the statement and find out the value of the IRA the day prior to the contribution and the most recent value. Write these values down. Assume the IRA value was $10,000 the day before the new, over contribution and that the most recent value is $16,120.

  • Subtract the first value from the exiting value: $16,120 - $10,000 = $6,120.

  • Subtract the contribution made during this period from the difference in values: $6,120 - $6,000 = $120. This is the total earnings for the period.

  • Multiply the over contribution percentage with the total earnings for the period to find out the percentage of earnings attributed to the over contribution: 20% x $120 = $24. Your over contribution earnings is $24 and needs to be removed with the over contribution.

Tips & Warnings

  • The IRS has contribution limits that are phased out based on income as of 2010. Single filers covered by employer plans can make a full contribution if adjusted gross income is less than $56,000. Income between $56,000 and $66,000 can make a partial contribution. Married couples filing jointly with one spouse covered by employer plans can make full contributions if adjusted gross income is less than $89,000; phaseout contributions exist with incomes between $89,000 and $109,000. Couples not covered by any employer plan have a phaseout schedule between $167,000 to $177,000; there are no limits for single filers with no employer coverage.
  • Speak with a tax adviser if you are concerned about over contributing to an IRA if you fall within the phaseout income levels.

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  • Photo Credit A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
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