The IRS puts annual income limits on a Roth IRA. When you exceed that limit, the IRS generally charges a 6% tax penalty for each year the excess contributions remain in your account. This is triggered at the time you file each year’s taxes, giving you until that deadline to remove or recharacterize the misplaced funds. Here’s what you need to know.
A financial advisor can help optimize your retirement plan to lower your tax liability.
A Roth IRA is what’s called a post-tax retirement account. You contribute to this portfolio with money on which you have already paid taxes, with no current tax benefits for the money invested. The portfolio grows tax-deferred, like a pre-tax retirement account, and in retirement you pay no taxes on the money you withdraw.
This generally makes a Roth IRA dollar-for-dollar more valuable than a traditional IRA, but more expensive to build.
However, unlike almost all pre-tax retirement accounts, the IRS puts income limits on contributions to a Roth IRA known as the “phase out.” Within the phase-out window, you are allowed reduced annual contributions to a Roth account. Above it, you are allowed none at all.
In 2024, for example, an individual filer can make full contributions with modified adjusted gross income (MAGI) of up to $146,000. They can make partial contributions between $146,000 and $161,000, and they cannot contribute to a Roth IRA at incomes above $161,000. Joint filers can make full contributions with MAGI up to $230,000. They can make partial contributions between $230,000 and $240,000, and they cannot contribute to a Roth IRA at incomes above $240,000.
In 2024, the full contribution limit for an IRA is $7,000 with an additional $1,000 catch-up contribution for taxpayers over the age of 50.
It’s relatively easy to exceed Roth contribution limits. This can happen most easily if your income changes during the year. It’s common for households to maximize their contributions early in the year, to capture the next 12 months’ gains. If, later on, you receive a raise, you might retroactively exceed the program’s caps. For individuals who earn near the Roth income limits, this is a particular risk worth paying attention to.
If your Roth contributions exceed your household limits for whatever reason, you have until the following year’s tax deadline to make a correction. For example, say that you exceed your Roth limits in 2024. You can fix this error by April 15, 2025, or October 15, 2025 if you file for an extended deadline. If you don’t correct a Roth contribution error, the IRS charges a tax penalty worth 6% of the excess contributions each year until the error is corrected.
You can correct excess Roth contributions in three main ways:
You can withdraw all excess contributions, along with all of the associated returns (called net income attributable, or NIA), by the time you file your taxes. You will not be charged early withdrawal penalties, however you will have to claim the earnings on your income taxes.
You can move any excess contributions from a Roth IRA to a traditional IRA portfolio. This is known as recharacterizing. You can do this either by contacting your portfolio manager or moving the funds yourself. This is typically a strong option, given that there is no income cap on pre-tax IRA contributions, just their deductibility. You can recharacterize both contributions and income/returns (which count as NIA). You may be able to take a tax deduction for the contributions moved over, but not the returns.
You can apply a previous year’s excess contributions to a future year’s Roth IRA contributions. For example, say that you exceeded your Roth contributions by $1,000 in 2024. You can count that as the first $1,000 contributed to your Roth account in 2025.
In this case, you will still need to pay the 6% penalty each year before applying the forward contributions. For example, here you would pay the 6% penalty on 2024’s taxes, but the error would be corrected for 2025’s taxes.
If you exceed your Roth contribution limit, you have until that year’s tax filing deadline to correct the error. If not, you pay a 6% tax penalty each year that the excess contributions and associated returns remain in your account.
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Eric ReedEric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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