Skip to main content
No. of Recommendations: 0
So I am getting to the point where my salary will hit the maximum allowed for contributions to my Roth IRA. My problem is that my annual bonus is what is pushing me to the limit, and I can't say for sure that I will get one next year or if it will be the same amount. My question is what happens if I over contribute to my Roth?

Mark
Print the post Back To Top
No. of Recommendations: 0
My question is what happens if I over contribute to my Roth?

If you contribute to a Roth and later discover that you don't qualify to contribute to the Roth or you contributed more than you qualified to contribute (i.e., in the phase-out for contributing), you have a couple options:

1. You can recharacterize the contribution as a Traditional IRA contribution. It is likely this would be recharacterized as a non-deductible contribution to a Traditional IRA. If your investment plan involves tax-inefficient investments (e.g., bonds, REITs), this can still make perfect sense (cents).

or

2. You can withdraw your Roth IRA contributions and corresponding earnings. Any earnings would have to be treated as income for the year for which the contributions were made. (E.g., if you discovered that you did not qualify for Tax Year 2004 Roth IRA contributions and then withdraw the contributions and corresponding earnings in January 2005, the earnings you withdrew would be treated as 2004 income.) If your investment plan requires more tax-efficient investments (e.g., a broadly based stock index fund, or a tax-managed stock fund, or municipal bonds) or instruments that already have built-in tax deferral (United States Savings Bonds--up to 30 years), this option can make perfect sense.

Your Roth IRA custodian should have forms for both options (both recharacterixations and withdrawals) because these are normal issues that they have to deal with.
Print the post Back To Top