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Saving for retirement can often be a daunting task. Individual retirement accounts (IRAs) are a great way to save for retirement, but what happens if you contribute to a Roth IRA and your income is too high? What if you contribute more than you're allowed to a Roth or traditional IRA?
Though it would be great if you could put all your money into a Roth (think: tax-free growth and withdrawals), the Internal Revenue Service (IRS) limits how much you can contribute each year. You must be eligible to contribute based on your income. And if you are eligible, there are limits to the amount you can contribute. Likewise, there are contribution limits for traditional IRAs. But, the income limits for these IRAs have to do with deducting contributions from your taxes.
If you violate one of the rules, you’ve made an ineligible (or excess) contribution. This means you’ll owe a 6% penalty on the amount each year until you fix the mistake. Additionally, you will not be allowed to deduct excess contributions from your income as you normally would with traditional IRA contributions.
The most you can contribute to Roth and traditional IRAs is as follows:
Roth IRAs have an additional restriction: Whether you can contribute up to the limit—or anything at all—depends on your modified adjusted gross income (MAGI). Here's a look at the Roth IRA income limits for 2023 and 2024:
| Roth IRA Income Limits for 2023 and 2024 | |||
|---|---|---|---|
| If your filing status is… | And your 2023 modified AGI is… | And your 2024 modified AGI is… | You can contribute… |
| Married filing jointly or qualifying widow(er) | Less than $218,000 | Less than $230,000 | Up to the limit |
| More than $218,000 but less than $228,000 | More than $230,000 but less than $240,000 | A reduced amount | |
| $228,000 or more | $240,000 or more | Zero | |
| Single, head of household, or married filing separately and you didn't live with your spouse at any time during the year | Less than $138,000 | Less than $146,000 | Up to the limit |
| More than $138,000 but less than $153,000 | More than $146,000 but less than $161,000 | A reduced amount | |
| More than $153,000 | More than $161,000 | Zero | |
| Married filing separately and you lived with your spouse at any time during the year | Less than $10,000 | Less than $10,000 | |
| $10,000 or more | $10,000 or more | Zero | |
If you contributed to a Roth when you made too much to qualify—or if you contributed more than you’re allowed to either IRA—you’ve made an excess contribution. That contribution is subject to a 6% tax penalty.
The maximum contribution limit of $6,500 for 2023 ($7,000 in 2024) for IRAs ($7,500 in 2023 and $8,000 in 2024 for those 50 years and older) is the combined total you can contribute to all your IRAs. That means if you have a traditional IRA and a Roth IRA, your total contribution to those two accounts maxes out at $6,500 in 2023 and $7,000 in 2024. Remember, that amount increases to $7,500 in 2023 and $8,000 in 2024 if you meet the catch-up contribution rule.
The amount you contribute can't be more than your earned income for the year. For example, if your earned income is $4,000, that’s the most you can contribute to an IRA.
The penalty for an ineligible contribution is 6% of the excess amount. You pay this penalty when you file your income tax return using IRS Form 5329.
If you don’t fix the mistake, you’ll owe the penalty each year the excess remains in your account. If you’re not eligible to take a qualified distribution from your IRA to fix the mistake, you’ll pay an additional 10% early withdrawal penalty on earnings (interest).
If you make too much money, you might be able to get around income limits with a backdoor Roth.
The IRS provides a specific formula to calculate earnings (or losses) attributable to an excess contribution.
Net income = excess contribution × A C B − A O B A O B where: A O B = Adjusted Opening Balance A C B = Adjusted Closing Balance \begin &\text=\text\times\frac\\ &\textbf\\ &AOB = \text\\ &ACB = \text\\ \end Net income = excess contribution × A OB A CB − A OB where: A OB = Adjusted Opening Balance A CB = Adjusted Closing Balance
There are several ways to correct an excess contribution to an IRA:
In addition to the formula, there are some fine points to consider in correcting excess IRA contributions.
Most people who make ineligible contributions to an IRA do so accidentally. For example, you could contribute too much if you meet the following criteria:
In an honest attempt to fund your retirement accounts, you could make an excess contribution. The IRS anticipates that this will happen and provides guidelines to help you fix the mistake.
Here's an example that illustrates a mistake and how to apply the formula to calculate earnings.
Mary contributed $3,000 to her traditional IRA last year. When filing her taxes, she realized she could only contribute $2,000 because she only had $2,000 in earned income for the year. She requests to remove the $1,000 excess.
Before the contribution, Mary's IRA balance was $12,000, and it's now worth $18,000. She didn't make any additional contributions or distributions. Her adjusted closing balance is $18,000 and her adjusted opening balance is $15,000 ($12,000 + $3,000). She uses the IRS formula to determine the earnings:
= $ 1000 × $ 18000 − $ 15000 $ 15000 = $ 1000 × $ 3000 $ 15000 = $ 200 earnings \begin &=\$ 1000\times\frac\\ &=\frac\\ &=\$ 200 \text< earnings>\\ \end = $1000 × $15000 $18000 − $15000 = $15000 $1000 × $3000 = $200 earnings
Mary will remove $1,200 ($1,000 excess contribution plus $200 earnings attributable to the excess contribution).
If you contribute too much to an IRA, you will pay a 6% penalty on the amount over the allowable limit. You'll pay this penalty when you file your taxes for the year, so if you can fix the excess contribution before then, you should do so.
Your modified adjusted gross income is the number the IRS uses to determine your eligibility for annual contributions to a Roth IRA. The MAGI is determined by adding certain deductions back to your adjusted gross income. If you are uncertain about what your MAGI will be for the year, be conservative with your contributions until you do your taxes to avoid excess contributions.
You must be 50 years old at the end of the calendar year that you'll pay taxes for to qualify for a catch-up contribution. For example, you must be 50 by the end of 2023 to contribute $7,500 to your IRA or Roth IRA for the 2023 tax year. The amount increases in 2024 to $7,000 and $8,000 for people 50 and over.
You can avoid excess contributions by paying attention to your earned income, modified adjusted gross income, and annual contribution limits. Also, keep track of any contributions you’ve already made for the tax year—and be sure you allocate any contributions made between Jan. 1 and the tax filing deadline to the correct year. Finally, if you make a mistake, act quickly to fix it so you can limit the penalties you’ll owe.