Every year we have clients that make Roth IRA contributions. Sometimes a client discovers that they were ineligible to make a contribution (this discovery usually happens when they file their tax return) due to an increase in income for that tax year. The contribution and calculated earnings must then be withdrawn before the tax filing deadline in order to avoid a 6% excise tax penalty by the IRS for this excess contribution.
Tip: It is important that you check with your CPA/Accountant first to see if you are still eligible (due to the income limits) to make a Roth IRA contribution for the specified tax year. It is a good idea to take a look in January, at the Income Contribution Limit tables that the IRS puts out each year. These tables identify single filers, joint filers, head of households, etc. and the range of income that each can potentially earn to make a full contribution, partial contribution or no contribution.
If you’re eligible to contribute to a Roth (if you and your spouse file jointly and have taxable compensation and are below the IRS’s income limits), you may want to take advantage of that because one of the benefits of this type of IRA is that the earnings on your contributions come out tax free. That is, as long as it is a qualified distribution, meaning that it has been at least 5 years since you established and contributed to a Roth IRA and you are at least age 59 ½ at the time of the distribution. But, before you make the final decision to contribute to a Roth, it is important that you do your own due diligence as well as consult with a tax advisor regarding your Modified Adjusted Gross Income (MAGI).
For your reference, I have included a link below to the IRS’s 2017 and 2016 Income Limit Tables.
Fort Pitt does not provide tax advice. We encourage you to contact your tax professional with any questions.