Question: What is the consequence of over funding my Roth IRA?
Answer: There are many restrictions that come with Roth IRA contributions. Currently, the maximum annual contribution amount is $5,500 ($6,500 for those age 50 or older). But you need to also have earned income to contribute to a Roth IRA. Contributions themselves are limited by a concept called ‘modified adjusted gross income’ or MAGI. You must have MAGI under $120,000 ($189,000 on joint tax returns) for a maximum contribution.
Those people who make excess contributions (excess of MAGI) to a Roth can face significant penalties. Excess contributions are subject to a 6% penalty every year until the overage is remedied. The continuing penalty also applies to beneficiaries after the Roth IRA owner’s death. Moreover, the earnings attributable to an excess contribution must also be withdrawn when the excess amount is corrected.
Comment: Often times clients simply arrange for monthly transfers to a Roth IRA without considering their own MAGI. Sometimes tax preparers do not know that Roth IRA contributions are being made (there is no tax reporting requirement for Roth IRA contributions). In order to mitigate the damage once discovered, the taxpayer should withdraw the amounts of excess contributions as soon as possible. Any income attributable to those contributions must be withdrawn as well.
One final note – the excess Roth IRA contributions for a calendar year can be corrected (with no penalty) by withdrawing the required amount by October 15 of the following year.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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