You Contributed to Both an IRA and a Roth IRA – Now What?
By Beverly DeVeny, Chief IRA Analyst
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Can you contribute to both an IRA and a Roth IRA in the same year? Yes, if you follow the rules.
You must have earned income – generally wages from a job or self-employment – in order to make a contribution. If you do not have earned income, but your spouse does, you may be able to make a spousal contribution. On the IRA side you must be under the age of 70 ½. You cannot make any further IRA contributions once you reach the year you turn 70 ½. On the Roth IRA side, you must meet certain income limits. Once your income is too high, you can no longer contribute to a Roth IRA. The income limits are indexed for inflation each year. You can find the limits on our website or in IRS Publication 590-A at www.irs.gov.
There is one final rule. You can contribute to both an IRA and a Roth IRA, but the most you can contribute is $5,500 for a year ($6,500 if you are 50 or older during the year). That $5,500 ($6,500) is a combined total. You cannot contribute $5,500 ($6,500) to an IRA and an additional $5,500 ($6,500) to a Roth IRA. You can split the $5,500 ($6,500) between the IRA and Roth IRA in any amounts you wish, but you are capped at $5,500 ($6,500). Here’s the complete 2016 IRA and tax tables.
The Little Known Fact
If you made contributions to both your IRA and your Roth IRA and exceeded the limit, then you have made an excess contribution. But which account is it in? You probably want to keep your full Roth IRA contribution because that will most likely benefit you more long term. But, sorry, you can’t. The IRS regulations say that contributions are allocated first to the IRA and then to the Roth IRA. If there is an excess contribution, it is in the Roth IRA and must be removed from the Roth IRA. Where does it say that – I can hear the CPAs asking that. It is Reg. § 1.408A-3, Q&A3(d), Example 2.
There is an alternative school of thought on correcting the excess. Some experts believe that if the excess is corrected by October 15 of the year after the contribution, that it can be taken from either the IRA or the Roth IRA. This conclusion is also based on the Regulations, specifically Reg. § 1.408A-3, Q&A7. In the answer, IRS says that if the excess contribution is timely removed along with the net income attributable to the contribution, then the contribution is treated as if it never happened. So, if you remove the excess from the IRA and it is treated as if it never happened, then there is no excess amount that must be removed from the Roth IRA.
The first approach is the more conservative approach.
The next question I hear is, “how will IRS know?” They have the ability to figure it out from the tax reporting done for your contributions and for corrections of excess contributions. But the main thing to consider is that if you do not properly correct the excess contribution in the Roth IRA, the statute of limitations does not start to run. That means that you owe 6% of the excess amount for every single year that it remains in the Roth IRA – plus interest – plus failure to file penalties and interest – and you could perhaps owe an accuracy related penalty although that is unlikely when you consider the small amount due on an excess contribution in the amount of $5,500.
Before correcting an excess contribution, be sure you know the rules. You should consult IRS Publication 590-A or a knowledgeable advisor.