What Happens If You Contribute Too Much To Your Roth IRA

Since its introduction in 1998, the Roth individual retirement account has become a popular and powerful tool for investing toward retirement. Named after former Delaware Sen. William Roth, the Roth IRA differed from other retirement accounts of the time. Instead of paying income tax on withdrawals made during retirement, a Roth IRA taxes contributions made into the account. In other words, you're contributing post-tax income into a Roth IRA. However, when it comes time to take distributions from the account during retirement, no taxes whatsoever are due, as earnings grow tax-free.

The Roth IRA tax treatment is advantageous because, invested wisely, the funds in a retirement account will grow considerably over years or even decades. Therefore, it's preferable to pay taxes on the funds contributed now rather than their much higher future value. Additionally, Roth IRAs don't have required minimum distributions unlike a traditional IRA. If you don't need the funds in your Roth IRA, you can continue to let the account grow, untouched.

This raises the question as to how much you can contribute to your new or existing Roth IRA? For 2024, the maximum amount is $7,000 per year. Americans age 50 or older can contribute $8,000 per year in 2024, in "catch-up" contributions. Also note that the IRA contribution limits apply to all of your IRA accounts, not each. If you have a traditional IRA and a Roth IRA, the maximum is $7,000 ($8,000 if age 50-plus) between both retirement accounts. With that in mind, what happens if you contribute too much by accident? Let's take a look.

We mentioned the $7,000/$8,000 contribution limit in 2024 as a rule of thumb, but there is another nuance to consider. In particular, your Roth IRA contribution can't exceed your household's earned income. If you've accidentally exceeded the contribution limit for your IRA accounts, Roth included, the primary solution is simple enough. You'll need to remove the excess funds, plus any investment returns earned by those funds. As well, this correction needs to occur by the same deadline to file your income taxes.

Any capital gains or investment income generated by the excess IRA contribution will be subject to the appropriate income tax. In the case that the excess contribution amount isn't removed until after you have filed your income tax return, you could be required to file an amended return to reflect the additional investment income, if applicable. Over-contributions which aren't promptly removed from your Roth IRA may be subject to a 6% annual penalty. (On that note, what are unrealized capital gains and do they affect you?)

It's worth mentioning that if your Roth IRA over-contribution happened because of your income limit, but is at or below the $7,000/$8,000 total limit for individual retirement accounts, you may be able to reconfigure a portion of your contribution toward a standard non-Roth IRA. That's because those types of accounts are only subject to the absolute maximum contribution and not income limitations.

Opinions vary on how much Americans think they'll need to retire comfortably. Some experts recommend budgeting at least 15% of your income each year toward retirement. For higher-earning individuals, that means only a portion of your salary can go toward an IRA of any type. However, other worthy retirement accounts exist, including the 401(k) and 403(b), both of which have higher contribution limits than an IRA, allowing zealous retirement savers the opportunity to spread out contributions among several types of accounts.

Finally, research if your employer offers a matching contribution into a company retirement plan. Match rates vary, but the average employer match in 2024 is 4.6%, per investment firm Vanguard. That means for an employee earning $60,000 per year, your company may be willing to match your annual contribution up to $2,760 every year, for a total contribution of $5,520. That's literally free money from your employer, so even if your budget is tight, at least try to invest up to the match limit.