Contributing to a Roth IRA
Roth IRAs are a type of individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. However, there are income limits for contributing to a Roth IRA. For 2023, the income limits are:
- $140,000 for single filers
- $218,000 for married couples filing jointly
Consequences of Excess Contributions
If you contribute more than the allowable limit to your Roth IRA, the excess contributions will be subject to a 6% excise tax for each year they remain in the account. The tax is applied to the total amount of excess contributions, not just the earnings on those contributions.
Options for Correcting Excess Contributions
If you realize that you have made excess contributions to your Roth IRA, you have three options for correcting the situation:
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Remove the excess contributions. You can withdraw the excess contributions, plus any earnings on those contributions, by the tax filing deadline (April 15th for most people). You will not owe any taxes or penalties on the withdrawn funds.
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Recharacterize the contributions. If you are eligible to contribute to a traditional IRA, you can recharacterize the excess Roth IRA contributions as traditional IRA contributions. This will avoid the 6% excise tax, but you will lose the tax-free growth benefits of a Roth IRA.
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Pay the 6% excise tax. If you do not withdraw or recharacterize the excess contributions, you will owe a 6% excise tax on the excess contributions for each year they remain in the account.
Additional Considerations
- If you are married and file a joint tax return, the income limit for Roth IRA contributions is based on your combined income.
- If you are covered by an employer-sponsored retirement plan, the income limits for Roth IRA contributions may be lower.
- The income limits for Roth IRA contributions are adjusted annually for inflation.
It is important to be aware of the income limits for Roth IRA contributions to avoid the 6% excise tax. If you contribute more than the allowable limit, you have three options for correcting the situation: remove the excess contributions, recharacterize the contributions, or pay the 6% excise tax.
What Happens If You Hit the Roth IRA Income Limit?
FAQ
What happens if I contribute to a Roth IRA but make too much money?
Can I invest in Roth IRA if my income is too high?
How does the IRS know if you over contribute to a Roth IRA?
Can you do a Roth conversion if your income is too high?
What happens if a Roth IRA contributes too much?
Excess contributions are subject to a 6% excise tax for each year they remain in your Roth IRA. To avoid this penalty, withdraw the excess funds before your tax deadline. What happens if I contribute to a Roth IRA and later exceed the income limits?
What if I contribute too much to my IRA?
If you contribute too much to your IRA, you have 3 options: Complete a return of excess contributions form, recharacterize your contributions, or apply your contributions to the next year. Just by contributing to your individual retirement account (IRA), you’re ahead of the game.
Can I apply Excess Roth IRA contributions to a future year?
You can also apply the excess contribution and its earnings to a future year’s Roth IRA as long as you stay within the limits for that year. In this case, you may still be subject to the 6% penalty for the year. What Happens if You Don”t Remove Excess Roth IRA Contributions?
What if I overcontribute to my Roth IRA?
It’s not uncommon to accidentally overcontribute to your Roth IRA or traditional IRA or mistakenly contribute if you’re ineligible. If you contribute too much to your IRA, you have 3 options: Complete a return of excess contributions form, recharacterize your contributions, or apply your contributions to the next year.