Comments on: What if You Contribute Too Much to a Roth IRA? http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/ Money Management, Small Business, Career Thu, 09 Feb 2012 19:08:34 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Debra Beasley http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-45288 Debra Beasley Fri, 06 Jan 2012 21:38:45 +0000 http://cashmoneylife.com/?p=2156#comment-45288 Bob, I recommend reversing your contribution before you file your taxes for 2011. Otherwise, you'll have to pay a 6% excise tax for each year that you have the excess contribution. Since you were unemployed most of the year, you should be glad to have $5000 extra (I know I would). If you have other IRA funds, this would have been a good year to convert some of them to a Roth (while your income tax rate was low). Unfortunately, the deadline for conversions was Dec 31 - but it may be something to consider for next year, if you are still unemployed (or in a low income tax bracket). If you do decide to do a Roth conversion, you want to do it when the market is down (or you think it is down). And, if the market goes down a lot more (or your income goes up significantly - or you just don't have the money to pay the taxes, you can always re-characterize your Roth money (back to an IRA) as long as you do it before you file you next tax return (counting extensions). So, if you file an extension, you get an extra six months to re-characterize. Bob,
I recommend reversing your contribution before you file your taxes for 2011. Otherwise, you’ll have to pay a 6% excise tax for each year that you have the excess contribution. Since you were unemployed most of the year, you should be glad to have $5000 extra (I know I would). If you have other IRA funds, this would have been a good year to convert some of them to a Roth (while your income tax rate was low). Unfortunately, the deadline for conversions was Dec 31 – but it may be something to consider for next year, if you are still unemployed (or in a low income tax bracket). If you do decide to do a Roth conversion, you want to do it when the market is down (or you think it is down). And, if the market goes down a lot more (or your income goes up significantly – or you just don’t have the money to pay the taxes, you can always re-characterize your Roth money (back to an IRA) as long as you do it before you file you next tax return (counting extensions). So, if you file an extension, you get an extra six months to re-characterize.

]]> By: Ryan http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-45283 Ryan Fri, 06 Jan 2012 14:04:42 +0000 http://cashmoneylife.com/?p=2156#comment-45283 Bob, I recommend speaking with a tax pro on this one. You need to have earned income in order to qualify for a Roth IRA. So the first $1,000 is probably OK, but unless you had any other earned income, you may not be eligible to contribute to the IRA, which could get you into hot water later on if the IRS ever finds out. I have no idea what the odds of them catching this are, but it's better to take the hit now than to be caught later and have to pay penalties and fees, which could add up to a large amount if this isn't caught for a long time. Bob, I recommend speaking with a tax pro on this one. You need to have earned income in order to qualify for a Roth IRA. So the first $1,000 is probably OK, but unless you had any other earned income, you may not be eligible to contribute to the IRA, which could get you into hot water later on if the IRS ever finds out. I have no idea what the odds of them catching this are, but it’s better to take the hit now than to be caught later and have to pay penalties and fees, which could add up to a large amount if this isn’t caught for a long time.

]]> By: Bob http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-45279 Bob Fri, 06 Jan 2012 09:11:03 +0000 http://cashmoneylife.com/?p=2156#comment-45279 Hi Ryan, In January 2011 I put in $6,000 into my Roth IRA account (I am over 50). TWo weeks later I was laid off and only earned $1,000 in earned income that year. Since I did not go over the "maximum" amount to contribute would this create a red flag with the IRS, especially since you don't deduct a Roth IRA on your tax returns? Bob Hi Ryan,

In January 2011 I put in $6,000 into my Roth IRA account (I am over 50). TWo weeks later I was laid off and only earned $1,000 in earned income that year. Since I did not go over the “maximum” amount to contribute would this create a red flag with the IRS, especially since you don’t deduct a Roth IRA on your tax returns?
Bob

]]> By: Ryan http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-34999 Ryan Thu, 22 Sep 2011 11:57:50 +0000 http://cashmoneylife.com/?p=2156#comment-34999 Hi Grace, The answer is yes to the IRA question and yes to the TSP + IRA. As a general rule, IRAs have an annual contribution limit of $5,000 per individual. There are income limitations which limit which IRA you can contribute to, for example, deductible IRAs, Roth IRAs and non-deductible IRAs. I recommend reading up on <a href="http://cashmoneylife.com/traditional-roth-ira-contribution-limits/" rel="nofollow">IRA Contribution Limits</a> to better understand the requirements. If you are only eligible to contribute to the non-deductible IRA, you can still max it out each year then convert it to a Roth IRA. The tax implication, assuming this is your only Traditional IRA, is that you have to pay taxes on the earnings since you made the contribution. If you do the conversion immediately, there won't be any earnings to be taxed. Calculating your taxes can get a little more complicated if you already have a deductible Traditional IRA. If this is the case, I recommend finding a financial planner to help you determine the tax implications and if this is the right move for you. If you only have Roth IRAs to this point, then go for it. You will need to repeat the process each year since IRA contributions are on an annual basis. It's not too big of a hassle though, as it only requires a little bit of paperwork. The benefit of the Roth IRA conversion is as you mentioned - the funds in the account will be tax free when you reach retirement age and begin withdrawals. Regarding multiple retirement plans: The Thrift Savings Plan and similar employer sponsored retirement plans such as a 401(b), 401(k), etc. are separate from IRAs, which are Individual retirement arrangements. You can contribute to each of these as they don't overlap in any way. The following article may be helpful in understanding how your retirement accounts work with each other: <a href="http://cashmoneylife.com/how-many-retirement-accounts-can-you-have/" rel="nofollow">How Many Retirement Accounts Can You Have?</a>. Hi Grace, The answer is yes to the IRA question and yes to the TSP + IRA.

As a general rule, IRAs have an annual contribution limit of $5,000 per individual. There are income limitations which limit which IRA you can contribute to, for example, deductible IRAs, Roth IRAs and non-deductible IRAs. I recommend reading up on IRA Contribution Limits to better understand the requirements.

If you are only eligible to contribute to the non-deductible IRA, you can still max it out each year then convert it to a Roth IRA. The tax implication, assuming this is your only Traditional IRA, is that you have to pay taxes on the earnings since you made the contribution. If you do the conversion immediately, there won’t be any earnings to be taxed. Calculating your taxes can get a little more complicated if you already have a deductible Traditional IRA. If this is the case, I recommend finding a financial planner to help you determine the tax implications and if this is the right move for you. If you only have Roth IRAs to this point, then go for it.

You will need to repeat the process each year since IRA contributions are on an annual basis. It’s not too big of a hassle though, as it only requires a little bit of paperwork. The benefit of the Roth IRA conversion is as you mentioned – the funds in the account will be tax free when you reach retirement age and begin withdrawals.

Regarding multiple retirement plans: The Thrift Savings Plan and similar employer sponsored retirement plans such as a 401(b), 401(k), etc. are separate from IRAs, which are Individual retirement arrangements. You can contribute to each of these as they don’t overlap in any way. The following article may be helpful in understanding how your retirement accounts work with each other: How Many Retirement Accounts Can You Have?.

]]> By: Grace http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-34998 Grace Thu, 22 Sep 2011 11:47:36 +0000 http://cashmoneylife.com/?p=2156#comment-34998 So, I have to do this every year? For example, contribute to the traditional IRA in year 1, convert it to Roth in year 2, and repeat, contribute to traditional IRA in year 2, convert it to Roth in year 3, so on... The tax implication is that when I convert, I just pay the tax on the earnings of the trational IRA, once it is converted to Roth, the earnings will be tax free 20, 30 years down the line? That is the main benefit of the conversion? Also, am I allowed to contribute to both 403(b) TSP of $16,500 AND traditional IRA of $5,000? So, I have to do this every year? For example, contribute to the traditional IRA in year 1, convert it to Roth in year 2, and repeat, contribute to traditional IRA in year 2, convert it to Roth in year 3, so on…

The tax implication is that when I convert, I just pay the tax on the earnings of the trational IRA, once it is converted to Roth, the earnings will be tax free 20, 30 years down the line? That is the main benefit of the conversion?

Also, am I allowed to contribute to both 403(b) TSP of $16,500 AND traditional IRA of $5,000?

]]> By: Ryan http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-34969 Ryan Wed, 21 Sep 2011 12:11:45 +0000 http://cashmoneylife.com/?p=2156#comment-34969 Grace, You still have options even if you exceed the income requirements for a Roth IRA. There is a back door method to contributing to a Roth: you can contribute to a non-traditional IRA, up to the max of $5,000 per person. Then you would have two choices: you can leave your contributions in a non-deductible IRA, or you can do a <a href="http://cashmoneylife.com/roth-ira-conversion/" rel="nofollow">Roth IRA conversion</a> to convert your contributions to a Roth IRA. Many IRA providers will help you with the Roth IRA conversion paperwork, but be sure to consult with an investment advisor if you need help with the process. Here are some additional ideas: <a href="http://cashmoneylife.com/retirement-investment-strategies-after-maxing-out-401k-ira/" rel="nofollow">Retirement Investment Strategies After Maxing Out 401k and IRA</a> Grace, You still have options even if you exceed the income requirements for a Roth IRA. There is a back door method to contributing to a Roth: you can contribute to a non-traditional IRA, up to the max of $5,000 per person. Then you would have two choices: you can leave your contributions in a non-deductible IRA, or you can do a Roth IRA conversion to convert your contributions to a Roth IRA. Many IRA providers will help you with the Roth IRA conversion paperwork, but be sure to consult with an investment advisor if you need help with the process.

Here are some additional ideas: Retirement Investment Strategies After Maxing Out 401k and IRA

]]> By: Grace http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-34968 Grace Wed, 21 Sep 2011 11:43:33 +0000 http://cashmoneylife.com/?p=2156#comment-34968 Thank you Ryan for your quick response. Ok, so the Roth IRA is out of the equation since we do not meet the income requirement. So if we both currently contribute the maximum amount allowed for Thrift Savings (TSP) of $16,500 each, and we want to do a separate retirement account outside of work, what kind of retirement plans are available for us to do? Thanks Thank you Ryan for your quick response.
Ok, so the Roth IRA is out of the equation since we do not meet the income requirement. So if we both currently contribute the maximum amount allowed for Thrift Savings (TSP) of $16,500 each, and we want to do a separate retirement account outside of work, what kind of retirement plans are available for us to do? Thanks

]]> By: Ryan http://cashmoneylife.com/what-if-you-contribute-too-much-to-a-roth-ira/#comment-34928 Ryan Mon, 19 Sep 2011 19:29:25 +0000 http://cashmoneylife.com/?p=2156#comment-34928 Grace, you can contribute any amount up to the maximum into a non-deductible Traditional IRA, and then convert it to a Roth IRA at any time after that (read more about <a href="http://cashmoneylife.com/roth-ira-conversion/" rel="nofollow">Roth IRA Conversions</a>). You would need to be aware that you would potentially owe any taxes on earnings in your IRA that occur between the time you make the contribution and you do the Roth IRA conversion. You would not, however, be able to contribute to a Traditional IRA, convert it to a Roth, then continue making contributions to the Roth IRA if you exceed the Roth income eligibility requirements. If you are considering a Roth IRA conversion, you may find it beneficial to speak with a financial planner to help you make sure you do the paperwork correctly. Grace, you can contribute any amount up to the maximum into a non-deductible Traditional IRA, and then convert it to a Roth IRA at any time after that (read more about Roth IRA Conversions). You would need to be aware that you would potentially owe any taxes on earnings in your IRA that occur between the time you make the contribution and you do the Roth IRA conversion.

You would not, however, be able to contribute to a Traditional IRA, convert it to a Roth, then continue making contributions to the Roth IRA if you exceed the Roth income eligibility requirements. If you are considering a Roth IRA conversion, you may find it beneficial to speak with a financial planner to help you make sure you do the paperwork correctly.

]]>