What Happens If You Exceed the Roth IRA Income Limit?
Roth IRAs are popular in part because they are for people who expect to earn more as they retire. Since you are taxed when you make contributions and not when you withdraw money, the theory is that you are now in a lower tax bracket than when you think about retirement.
So let’s say you set up a Roth IRA and are contributing regularly. You’re lucky! You get promoted and promoted, and all of a sudden, you exceed the income limit to contribute. Also good for you!
What’s going on now?
Well nothing. If you are not contributing, your Roth IRA will still earn on your investment and you can still adjust your allocations as you see fit.
You just need to tweak your retirement savings strategy a little.
2019 Roth IRA Contribution Limits
You may be aware that the 2019 contribution cap for traditional and Roth IRAs is $ 6,000 (or $ 7,000 if you are 50 or older). The maximum income for a full cap Roth IRA is $ 122,000 per person or $ 193,000 per couple. Please be aware that this is Modified Adjusted Gross Income and not taxable income.
There is also a phase-out limit for people with higher incomes. If you are married and file your tax return with an adjusted gross income of $ 193,000–203,000, you can still contribute part of the cap. Likewise, if you’re single with AGIs between $ 122,000 and $ 137,000. The IRS has a phase-out premium formula .
Zuzana Brochu , CFP based in Burlington, Vermont, said that if you are unsure if you will reach the limit, you can wait to pay Roth’s contribution until you pay taxes and validate your AGI. “This does not mean that you should not save or invest throughout the year,” she said. “You may want to pay these contributions to a taxable account until you are confident that you will be eligible for the Roth program this tax year.”
Over-investing or investing money in your Roth, regardless of the income cap, has consequences. Broshu said that if you over-contribute to the Roth IRA, you will have to withdraw the excess and any income from it. Otherwise, you will pay a 6% tax on ineligible contributions and also pay a 10% early withdrawal penalty if you are under 59.5 years old.
If you realize that you have made an excessive contribution, Broshu advised you to correct the error before the deadline for filing your tax return on April 15, so that you do not have to return later and file a corrected tax return.
Roth backdoor method
If you’ve fully hit the cap and want to keep investing, you’ll have to open a traditional IRA : it has the same annual contribution limit as Roth, but taxes the fees on withdrawals.
Then, if you are feeling really savvy (and, seriously, you have a financial specialist to help you), you can convert money from a traditional IRA to a Roth IRA using the so-called Backdoor Roth .
As Alicia Adamchik previously explained :
There are no restrictions on income for conversion. This can happen in one of several ways: you can make non-deductible contributions to a traditional IRA (in other words, you have already paid taxes on contributions) and then convert that account to Roth, or you can pay taxes on money when you convert.
There is no limit on how much money you can convert, but keep in mind that you must keep these funds in your Roth for five years or you will have to pay income taxes. If you are thinking of Backdoor Roth, consult a specialist.