What Happens If You Contribute Too Much To Your Roth IRA?
A Roth IRA is a great way to build funds for your future retirement, and it’s a popular option with investors. But, did you know that overcontributing to your account can lead to tax penalties and other financial troubles? Find out what happens if you contribute too much to your Roth IRA, and what you can do to prevent future issues
What Happens if I Contribute Too Much to my Roth IRA?
For anyone under age 50, the Roth IRA contribution limit is $6,000 in 2022 and $6,500 in 2023. Those who are over 50 years of age can add an additional $1,000 to their contributions for a total of $7,000 and $7,500. So, what if I contribute too much to my Roth IRA?
- Take Action: You can remedy the situation by removing or applying the excess contributions to a future year.
- Face Fines: If you don’t take out the excess funds, you can be fined a 6% tax on your excess contributions until the issue is resolved.
- Contact Employer: If the overpayment was a result of your employer, your employer should return the money to you as a "corrective distribution."
How Can I Undo an Overpayment to my Roth IRA?
What happens if you contribute too much to Roth IRA as an honest mistake? These things happen, and there are several ways to handle the issue. We recommend acting quickly to avoid penalties, so try to remedy the issue before your tax-filing deadline for the year.
- Pull Excess Contributions: You can simply withdraw the extra contributions and any income it has earned before your tax due date to avoid penalties. However, you may need to include these earnings in your taxable income - referred to as “net income attributable (NIA).”
- Recharacterize Contributions: You can shift your extra payments from your Roth IRA to a traditional IRA. According to the IRS, "If this is done by the due date for filing your tax return (including extensions), you can treat the contribution as made to the second IRA for that year (effectively ignoring the contribution to the first IRA)."
- Shift Contributions to Another Year: You can also keep your extra contributions in your Roth IRA, but apply these earnings to a future year instead of the current year. But, you might get your 6% penalty on the current year.
Plan Your Retirement with IntentGen
Now you know the answer to “What happens if I contribute too much to a Roth IRA?” - but, the team at IntentGen has plenty more financial advice to send your way! Contact us to learn more about everything from personal taxes to life insurance, and plan for your future with total confidence.