As a personal finance blogger, I have multiple investment, bank, and line of credit accounts. I need to have these accounts in order to discuss or recommend certain companies on Finance Throttle. As I was reviewing my Betterment Roth IRA account, I read that I have $1,500 left before I reach the 2021 contribution limit of $6,000. With 1 month left before the end of 2021, I remembered that I have another Roth IRA with M1 Finance. All of my Door Dash side hustle income went directly into my M1 Finance Roth IRA and Individual IRA.
I started to think about how the IRS is going to charge me a 6% penalty for every year I don’t resolve the Roth IRA overage. I logged into my M1 Finance Roth IRA and found that most of my Door Dash money was applied to the 2020 Tax Year. It turns out I only contributed $500 to the 2021 tax year. In the end, I didn’t contribute too much. I actually had $1,000 left to contribute to the 2021 Tax Year. This year is the first year I would have maxed out my $6,000 Roth IRA contribution limit. As long as I am able, I will max out my Roth IRA each year going forward.
What If You Contribute Too Much?
It turns out that over-contributing to your Traditional or Roth IRA is a common occurrence in the United States. It most often happens due to a change in income. If you have automatic percentage based monthly contributions, your contributions will increase when your pay increases. You must remember to adjust your contributions accordingly. There are actually three ways to you fix an IRA overage.
- Recharacterize Your Contributions – You can simply recharacterize your Roth IRA contribution to a Traditional IRA contribution. Like the Roth IRA, a Traditional IRA also has a $6,000 contribution limit ($7,000 if over 50). Don’t have a Traditional IRA? It is never too late to sign up using these links with Betterment or Wealthfront and get your first $5000 managed free. Or try M1 Finance here and get up to $30 when you fund your account.
- Withdraw Your Overage – If you don’t qualify for a Traditional IRA, you can withdraw your overage. When withdrawing money from your Roth IRA, you can select “Excessive Contributions” as the reason for the withdrawal. This can get complicated because you also need to withdraw the earnings on your contributions. If you lost money, you need to withdraw your contribution after-loss. In other words, you need to withdraw the net amount of your contributions. A Certified Professional Accountant (CPA) can help you with this. The deadline for withdrawing your money is the tax due date for that tax year – April 15th.
- Move Your Contributions To A Future Tax Year – You can move your 2021 contribution overage to the 2022 tax year. Depending on when you do this, you may have already incurred the 6% IRS tax penalty. If you don’t follow any of these three options to fix your overage, the IRS will charge you a 6% tax penalty every year until you fix the overage.
Luckily, I avoided the need to fix an overage. For those who went over the contribution limit, I hope this post helps. Going forward, I plan to create a spreadsheet template that helps me keep track of my investment contributions. Once finished, my spreadsheet will be available for sale with the rest of my templates found here.
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