Well that time came again to file taxes. Since my taxes are
fairly simple, I tend to file using one of the online tax fling services. Well everything was fine until I reached the
part where I was to enter my Roth IRA contributions for the year. Of course, I
contributed the max for 2019 of $6,000 thinking that my Adjusted Growth Income
will be under the $122,000 limit for a single filer. Well to my surprise my
income was above that.
So next I received a message stating that I had excess contributions
of
$1,340 and I had a choice of either removing the excess contributions or pay a
penalty. Naturally the software didn’t immediately tell me the penalty amount.
But I was curious as to what it could be. So I continued with the filing of my
federal taxes just the same, knowing that as long as I didn’t submit my taxes
at the end, I could make changes and withdraw the excess.
Well, when I finally got to the end of my federal tax
filing, I finally found out what the penalty would be if I decided not to
withdraw the excess contributions. To my surprise the penalty was only $80. That’s
right just $80. So naturally I decided not to withdraw the excess and just pay
the penalty. This is another one of those cases where we always here that “if
you contribute too much in your IRA, you must withdraw the excess or face a
penalty”. That statement automatically puts everyone in a panic. I was even in
a slight panic when I saw the message. But, being me, I wanted to know more
information before I went along with what the “norm” and it paid off.
If you have been reading my posts you know I love to
calculate things and my mind immediately went to, how much with my $1,340 grow
to at a 6% rate or 8% rate over the next 20 year. Here is what I found out. At
6% interest the $1,340 will grow to $4,435.67 at 6% and $6,601.92 at 8%. So
essentially if I would have withdrew the excess, I would have cost myself
between $3,095.67 to $5,261.92 in interest over the next 20 years just to avoid
paying an $80 penalty to the IRS.
So my point being for writing this article is, to do your
own homework when making decisions. Don’t go with what the masses say and
figure out the answer for yourself.
Ms. Smart
