I’m in my 40’s and I’m looking forward to retirement. With that said, I’m going to do everything I can to get there and be financially prepared for it like maximizing your 401K. Let’s say you’re already maximizing the allowed amount. You’re probably thinking about contributing to a Roth IRA because you hear about how the money that grows and that the money you withdraw is not taxable because you used after-tax money to contribute to it. Be aware of over investing with Roth IRAs.
That was my thought. Open a Roth IRA and contribute the maximum amount and for me it’s $6,000 per year. Little did I know that depending on your modified adjusted gross income (MAGI), you may not be eligible to contribute to a Roth IRA. When I read the word “eligible” I needed to know whether I was or not. Schwab has a post that breaks down the eligibility and based on whether you file Single or Joint, your eligibility is different. Here’s their chart.
When you are not eligible and you still contribute to a Roth IRA, there is a penalty. Investopedia explains it well. The quick and dirty is that there is a 6% penalty on the amount that is over contributed each year until the excess is fixed. In other words, if you over contribute one year, pay the 6% penalty, and don’t fix it, the following year you will continue to incur the 6% penalty until it is fixed.
You have options. My recommendation is to contact your broker or tax advisor. I contacted my broker and found out that this is a very common thing. Luckily, I have a after-tax cash account and I had to submit a form to have the funds transferred from my Roth IRA to it. And I asked whether there will be a penalty and the answer was no. There’s also the backdoor Roth IRA that can potentially help with Roth IRA contributions. Talk with a financial specialist or tax advisor.
When you start to educate yourself about financially planning for retirement, be aware of over investing especially with a Roth IRA. There are contribution limitations tied directly to your MAGI. Know that there is a 6% penalty for over investing and the penalty occurs every year until it is fixed. Be aware of over investing with your Roth IRA. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook and Instagram.