Contributing to Roth IRA When Not Eligible

Roth IRA provides tax-free growth so it can be a great way to save for retirement. However, not everyone is eligible to contribute to the Roth IRA every year. In order to be eligible to contribute to the Roth IRA, you can’t contribute if your modified adjusted gross income (MAGI) is over $144,000 in 2022 if you file as single or $214,000 if you are married filing jointly. The maximum one can contribute to the Roth IRA is 6,000 in 2022 for individuals under age 50 and $7,000 for those who are 50 or older. 

What if you contribute to the Roth IRA but you are not eligible?

This may happen if you contribute to the Roth IRA at the beginning of the year but then you make more money than you expected and income exceeds the threshold. If you don’t remove the excess Roth IRA contribution, you will be subject to a 6% of tax penalty until you do so. 

What can you do to remove the excess contribution? 

Firstly, you can simply withdraw the excess contribution and any income earned by the due date of your tax return (April 15th or October 15th with a filed extension). You will have to include the earnings as your taxable income for the year. If you have filed your tax return, you can still withdraw the money within 6 months and then file an amended tax return.

Secondly, you can recharacterize your excess contributions. You can move your excess contributions and any income earned from the Roth IRA to your Traditional IRA. Please do so under the guidance of your financial advisor.

Lastly, you can apply the excess contribution to a future year. If you believe that your income will be under the limitations in a future year, you can apply the contribution to that year. However, you may still be subject to the 6% penalty for the year in this case.

If you overcontribute to your Roth IRA but are confused about the remedy, please feel free to contact us at the message box below. We assist with our clients in this matter on a daily basis and have expertise built up. We are happy to assist you.