Two weeks ago, we spoke about how you can calculate your taxes owed in 2014 and we touched based on Roth IRA contributions. Below we have provided you a more in-depth look at maximum contribution levels and the cumulative Roth contribution penalty.
In 2015, the maximum you can contribute to all of your traditional and Roth IRAs combined is the smaller of:
- $5,500 ($6,500 if you’re age 50 or older), or
- your earned income for the year.
You may contribute the annual limit to a traditional IRA no matter what, but your income level will determine whether it is deductible for tax purposes or whether it is a nondeductible contribution for which you would have basis. Roth IRA contributions, however, may be limited based on your filing status and income.
What happens if you contribute money to a Roth IRA, but you were not eligible to do so or you contribute more than the annual limit? You will be subject to a 6% excise tax on your cumulative disallowed contributions.
Example 1: You have been contributing to a Roth IRA for several years, the maximum amount ($5,500) each year. However, in the past three years, your income was above the limit and you were not eligible to contribute to a Roth. You were not aware of the limit so you kept maxing out your contribution each year. Since you were not allowed to contribute you were subject to the 6% excise tax on your cumulative disallowed contributions each year. Here is how your tax liability would look:
Notice that by the end of year 3 you would have paid a total of $1,980 in excise taxes.
Example 2: Same facts as example 1 except you discover the issue in year 3 and withdraw your prior excess contributions. You also withdraw your year 3 excess contribution plus any earnings from your year 3 contribution.
For purposes of determining excess contributions, any contribution that is withdrawn before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. The earnings on the excess contributions must also be withdrawn.
Earnings do not have to be withdrawn for excess contributions on which the 6% excise tax was assessed.
If you do not meet the income limits for contributing to a Roth directly but would still like to participate in a Roth, or you have any question, please contact us at (314) 993-4285 or firstname.lastname@example.org