Oops. An IRA contribution error – The Ukiah Daily Journal


(Contributed)

If you contribute too much money into your IRA during the year, how do you correct the problem without facing a tax penalty? Here are some tips.

Remember the annual limits

2023 Annual IRA contribution limits

$6,500 per individual

$7,500 per individual if age 50 or older ($1,000 catch up provision)

This limit applies to the combination of contributions to both Traditional IRAs and Roth IRAs.

What causes excess contributions

Excess contributions can be caused by:

Combined total problem. This occurs when you have more than one IRA. Remember the annual limit is a combined total of all accounts. (Traditional IRA and Roth IRA combined)

Contributions without income. A contribution can only be made if you have income. Contributions made above your income but below the account limits are still considered excess contributions.

Whether your spouse is covered by a plan.

You are subject to a phaseout of your contribution. There are income limits that allow you to contribute each year. If you exceed the limit, all your contribution is deemed excessive. However, sometimes you can contribute to an IRA, but not the full annual amount because the allowed contribution can phase out with excess income.

Note: Age limits no longer apply. Remember you can now contribute to Traditional IRAs at any age. The old rules required you to stop contributions in the year you reach age 70 1/2 or later.

Corrective action and penalty

If you place too much money into your retirement account you have until the tax filing deadline including any extensions to remove the excess contribution. Any excess amount will be subject to a 6% penalty for each year the excess contribution remains in your account. You may also owe tax on contributions and earnings created by the excess contribution.

In addition:

Traditional IRAs. You will need to account for the additional income on your tax return. So if you discover the problem after you file your income tax return, you may need to file an amended tax return.

Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account is taxable.

Some ideas

What can you do to minimize the risk of excess contributions?

Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Conduct the math to ensure you will never contribute too much.

Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Want to wait for your refund? Remember you have until April 15 of the following year to fund your IRA. Consider taking advantage of this additional time.

Rollovers are not contributions. Remember rollovers are not contributions so the annual contribution limits do not apply. If you wish to roll funds from a qualified plan into your IRA, the excess contribution limits will not impact you as long as the rollover is handled correctly. It is a good idea to seek expert help in this area to ensure your rollover is compliant with tax code. For instance, there are usually tax obligations if the rollover is from a traditional IRA into a Roth IRA.

James Angell is a Willits based certified public accountant. His office is located at 461 S. Main St. and he can be reached at 707-459-4205.

 

 



Read More: Oops. An IRA contribution error – The Ukiah Daily Journal

2023-09-05 01:47:04

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