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What Happens if you Over-contribute to a ROTH IRA? (Excess Roth Contributions)

what happens if you over contribute to a

Roth IRA or IRA what is an excess

contribution to a Roth IRA in this video

I'll be answering those questions and

explaining what to do if you find

yourself in the situation of having an

excess contribution to a Roth IRA so

that you don't get penalized and you

actually understand the options you have

Amanda here from the business finance

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your screen back to excess contributions

so if you over contribute to a Roth that

is an excess contribution but an excess

contribution is contributing to a Roth

anytime you're not supposed to so if

your income for the year exceeds the

Roth income limitations then you can no

longer contribute now you get to

contribute up to $5,500 per year if

you're over 50 years old you get an

additional 1000 so 6500 this doesn't

affect if you have an employer or a

self-employed retirement plan like a

401k or a separ simple plan this is on

your own you get to contribute this 55

or 65 hundred to a Roth and/or an IRA so

you can do it to both types of accounts

but you can't do more than the limit of

55 or 65 hundred I'll be using 5500 for

the rest of this video if 65 applies to

you know that so how would you over

contribute well maybe you thought you

could contribute that amount to both and

you did you made a mistake or maybe you

rolled over an amount on accident or

what

commonly happens especially for the

self-employed is maybe you were below

the income limitation but your income

then went up during the year and you had

already contributed the 5500 or you were

contributing on a regular basis and you

met the max amount now there is a

phase-out range which means if your

income is between a range then your 5500

contribution amount will decrease down

to zero so you may be able to contribute

a portion but not the full amount or if

your above the maximum income limit then

your contribution amount is zero and if

you've contributed then you need to with

draw that money otherwise you'll get a

six percent penalty tax on your return

now you might say six percent penalty if

you're like me well wait a second that's

not that much depending on the IRA it's

probably not worth it but it could be in

certain instances however that six

percent penalty applies every year that

your excess contribution stays in and to

all the earnings so it's really not

advantageous you need to pull out any

excess contribution and you have up

until you file your current year's tax

return to do that or the deadline of the

return if you didn't file or file late

you do that by contacting your

investment firm that has your retirement

plan and withdrawing I would recommend

talking to them when you do this so that

you can specifically explain that this

is not a current year withdrawal which

could also have penalties because you're

not allowed to withdraw early on certain

funds so they need to be clear that this

is actually an excess contribution

withdrawal it's important to make that

clear to the investment firm the

investment firms typically do not

understand the tax implications and they

don't report them to you on Form 1099-r

you will get a form 1099 R that you need

to enter for your taxes these forms are

also filed with the IRS and that's why

it's important to enter them

it doesn't mean it will be taxable now I

said you had options you do have options

let's say you had gotten extra income

from your business but you don't really

think that you're going to get that

income next year one thing you could do

is allocate that excess amount to next

year but you have to do that through

calling and talking to your investment

firm in making sure that the amount is

allocated to your next year contribution

so that's what happens if you over

contribute to a Roth to recap if you

over contribute to a Roth it's called an

excess contribution and if you do

anything in which you contribute to a

Roth when you're not allowed it's called

an excess contribution as well

if you leave excess contribution in your

account all excess contribution plus any

earnings will be taxed at a 6% per year

penalty fee you have up until you file

your return or the due date if you file

late to withdraw these amounts be sure

that you withdraw all associated

earnings otherwise they will be

penalized the other reason you want to

get this done fairly quickly is because

you're going to get a 1099 R from the

investment company if you do fix this

you'll need to ask the investment firm

for a corrected form 1099 R as well and

do not trust your investment firm about

taxes they don't keep track of your tax

basis because they don't know your

personal situation and how you file well

that's all for excess contributions to

your Roth be sure to check out my other

videos in this retirement series

including how to do a back door of Roth

which explains how you can contribute to

a Roth even if your income is above the

limitations yes there's a way to do that

but you have to know it be sure to check

out that video if you're interested

thanks for watching I look forward to

seeing you around the channel bye