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What Happens When You Contribute Too Much To An IRA?

What Happens When You Contribute Too Much To An IRA?

An individual retirement account is a significant aspect of retirement plan pf an individual proposed by the taxation authority in United States. Under this plan, the retirement individuals can lead a carefree and hassle free retirement life after their endless years of service for the prosperity of the United States’ economy. Through Individual Retirement account, the retired individuals can enjoy the benefit of saving taxes on the money that they have saved in the account for their retirement period. Although IRA functions as a remarkable investment tool for retiring individuals, they still need to show some deep consideration on certain limitations. In other words, the individuals should not contribute too much to an IRA otherwise they would suffer at two instances:

  • They would gain pointless and undesirable attention from the Internal revenue service
  • They would be compelled to pay additional fees as they contribute to much too an IRA

Let us make this thing clear first that there are two types of Individual Retirement Accounts; one is traditional and other is ROTH. Therefore, when we are discussing what happens if a retiring individual contribute too much to an IRA, we will aim to show the outcomes and the ways if contributing excessively to Roth IRA.

The concept of contributing too much to an IRA explained through facts and figures

The notion of excessively contributing to Roth IRA is dependent upon the income level of those individuals who are heading towards retiring age. In other words, the retiring individual can only contribute too much to an IRA if he is segmented under high income bracket in the financial stratification of the United States economy. 

The retiring individuals should also keep in mind that once their Modified Adjustment Gross Income or the abbreviated MAGI crosses the proposed limit of $105,000 that is assigned for individual filers and $167,000 for those individuals who file for the account together, the contribution limit to IRA decreases subsequently. It means that if your income exacerbates from $120,000 for single filers and 170,000 for individuals who file with mutual understanding, the individual(s) will cease to make any contributions to their Roth IRA.

Can you predict the contribution limits?

For majority of the people, it is easy to envision as to what their contribution limits might be as they have a rough estimate of their income would be in each following year. However, at times, it is extremely difficult to plan and envision the contributions because the environment is highly unpredictable. It is because the economic environment is in a constant state of flus leading either to individual’s rise income or decrease and it is possible that their work situation may fall prey to unseen circumstances. For others their income and job situation may remain unchanged as both of them are highly secure. But for others, these changes will make IRA contribution planning complex.

Why planning is necessary and important for contributing to IRA?

If the retiring individuals want to hold themselves back so that that they do not contribute too much to an IRA, they need to plan and manage their contributions beforehand. It is because if they cease to take in to account planning and management tactics or take care of the circumstances in a well-timed manner and in the process end up contributing too much to an IRA, they have to pay a 6% excise tax on the excess contribution.

How can you refrain from contributing too much to an IRA?

In accordance with the requirements and formalities of Form 590 of Internal Revenue Service, if you contribute too much to an IRA, then on the excess contribution you have to pay 6% excise tax. However, this tax can be eliminated if you take these three steps:

  • Eliminate too much or excess contribution to your Roth IRA:  You can only circumvent the penalty tax by withdrawing excess contributions, refraining from crossing deadlines of tax payments and any earnings or loss that come from extensions of tax filing.
  • By reclassifying the Roth IRA in to Traditional IRA: you can only do so if you transfer the excess contributions from Roth IRA to traditional IRA and create an assumption that you are eligible for the traditional IRA.
  • For the upcoming tax year, apply for additional contributions.

So, we are clear on the point that IRA both Roth and Traditional accounts, are an exceptional investment planning tools for the retiring lives of the individuals. However, in the prospect of saving for their future retiring lives, the individuals contribute too much to an IRA that lead them to suffer additional costs and unwanted attention from IRS.

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