Contributing to a Roth IRA can be a great way to save for retirement, but putting too much money into your retirement account in any given year can trigger tax penalties. Fortunately, there are several ways to fix the problem and possibly avoid the penalties.𒊎

How Excess Roth IRA Contributions Can Happen

There are several reasons why you might contribute too much money to a Roth IRA acco꧂unt.

You Earned Too Little

You might overfund your Roth IRA if you earn less for the year than you originally expected. Like traditional IRAs, Roth IRAs must be funded with taxable compensation, money you make from a job or self-employment. Investment income doesn't count.

You can contribute the maximum allowed for a tax year or the amount of your compensation, whichever is less. So, at least part of your contribution might count as excessive if you made a full Roth IRA contribution at the beginning of the year but didn't ultimately earn that much.

You Earned Too Much

A more likely reason for over-contributing to a Roth IRA is that you earned more for the year than you expected and have already funded your Roth IRA to the max. The law sets 澳洲幸运5官方开奖结果体彩网:income limits on your eligibility for 澳洲幸运5官方开奖结果体彩网:contributing to a Roth IRA and on how much you can contribute if you are eligible.

Traditional IRAs do not have income limits on who can contribute, but your income can affect the extent to which your contri𒉰butions will be tax-deductible.

You can't contribute to a Roth IRA if you file your return as a single taxpayer and your 澳洲幸运5官方💃开奖结果体彩网:modified adjusted gross income (MAGI) in 2024 if you're single and your MAGI equals or exceeds $161,000. You're eligible to make a partial contribution if it ranges from $146,000 to $161,000. You can contribute up to the limit if it's below $146,000.

Married couples filing jointly for 2024 can't 澳洲幸运5官方开奖结果体彩网:contribute to a Roth IRA if they earn $240,000 or more. A MAGI from $230,000 to $240,000 means you can make a partial contribution. You're eligible for a full contribution if your income is under $230,000.

A 🧸substantial pay raise or bonus might push you over these limits if you're close to them, resulting in an excess contribution. You can calculate your reduced Roth IRA contribution limit using worksheets provided in .

3 Ways to Handle Excess Roth IRA Contributions

There are several possible remedies if you've contributed too much to your Roth IRA. You must generally act before your tax-filing deadline for the year, including 澳洲幸运5官方开奖结果体彩网:extensions, to avoid penalties. The penalty is a 6% tax on your excess contributions.

1. Withdraw Your Excess Contributions

You won't face any penalties if you simply withdraw your excess contribution plus any income earned by the due date for your tax return, including extensions. But you'll have to include the earnings portion in your taxable income for the year. The technical term for these earnings is 澳洲幸运5官方开奖结果体彩网:net income attributable (NIA).

You can still withdraw the contribution within six months of your tax return's due date, excluding extensions, even if you've already filed your tax return for the year.

You must "file an amended return pursuant to section 301.9100-2 with FILED written at the top," according to the IRS. The agency indicates that you should "Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return."

2. Recharacterize Your Excess Contributions

Another option is to 澳洲幸运5官方开奖结果体彩网:recharacterize your excess Roth contributions by moving them into a traditional IRA. You can do that by instructing the financial institution that holds your Roth IRA to transfer the excess amount, plus any income it has accumulated, into a traditional IRA eit🧜her at that same financial institution (a same-trustee transfer) or another one (a trustee-to-trustee transfer).

The IRS says, "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)."

Note that although the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) banned recharacterizing Roth contributions from a traditional IRA or other tax-advantaged accounts, starting in 2018, that does not apply to recharacterizing excess contributions in this situation.

3. Apply Your Excess Contributions to a Fꦅ🐽uture Year

You can also apply the excess contribution and 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% peܫnalty for the year.

The Bottom Line

You might inadvertently contribute too much to a Roth IRA for a few reasons. Fortunately, there are also several ways to correct the problem and possibly avoid any tax penalties. Consult with a tax professional if you're unsure which option is right for you or exactly how you should go about it.