What happens when a Roth IRA goes over the annual contribution limit?

[MoonShadow]

Here's the setup.  Each of my adopted kids is 'medically fragile', which means that, although they are not disabled in any obvious way, they are high risk for either physical health or mental health issues within their childhood.  As part of the adoption 'deal' (for lack of a better term) with the state, as former wards of the state, the state agrees to provide a fixed "subsidy" for their care, and the new parents (my wife & I) accept the risks.  We are then free to buy insurance on the private market, or not.  The subsidy is $690 per child per month.  We are considering having one each of those subsidies directly deposited into each of our Roth IRA accounts, primarily in order to make saving automatic, because doing it manually doesn't seem to be working out too well.  The obvious problem then becomes that $690 times 12 months equals $8280 in a year, or $2780 over the current contribution limit.  It will be many a year before the limit rises to meet that fixed subsidy amount.  So my question is, what happens after we break the contribution limit?  Changing the direct deposit of the subsidy is not an easy process, and not something that we are going to want to do every year.  What are the possible consequences of leaving this on automatic?

[MDM]

Not sure about the subject question, but...
...what about direct deposit of the state funds into "something else" (checking/savings/Vanguard Money Market/whatever) and then fund the IRA with automatic deposits from the "something else"?

You would then have excellent, and easily changeable, control over the IRA input.

[beltim]

The penalty for excess contributions to an IRA is 6% of the over-contributed amount, each year, for as long as the excess is in the account: http://www.taxact.com/support/1280/ira-or-roth-ira---excess-contributions/

It is relatively easy to withdraw excess contributions: https://investor.vanguard.com/ira/excess-contribution

I would, however, check your "deal" with the state to make sure that such a direct deposit is allowable.  Often these sorts of subsidies require you to show that you're using the money for the benefit of the child.

[forummm]

Vanguard won't let you contribute more than the maximum to your IRA. So I imagine they would cut off the contributions at $5500. Your provider (if not VG) may have the same policy. And if so, they would have a quandry about what to do with the extra funds that keep coming in.

I agree with MDM that you're making this overly complicated. Just send it to whatever other account you have and then setup auto-contributions from that other account for $458.33/mo.

[seattlecyclone]

To answer your direct question, your IRA provider may or may not even accept contributions that are clearly over the limit. If they do, you will have to pay a 6% penalty for any excess contributions that you don't withdraw by your tax filing deadline. This penalty will keep being assessed for each year the excess contributions remain in the account. I agree with MDM's suggestion to have the direct deposits go into a checking account, from which you can pull exactly the right amount each month.

[MoonShadow]

Not sure about the subject question, but...
...what about direct deposit of the state funds into "something else" (checking/savings/Vanguard Money Market/whatever) and then fund the IRA with automatic deposits from the "something else"?

That's what we have been doing for several years.  Depositing into a dedicated savings account, and then automatic transfers to other accounts.  We have discovered that this second set of scheduled/automated transfers is 'buggy' at best, and often fails in ways that it should not.  Unwinding the screw-ups has become enough of a regular aggravation that, when it happened again this morning, we agreed that this system wasn't working out for us.  So we are now investigating other ways to automate our finances.  Thinking about it, I'd say something goes wrong that costs us money and/or time to fix about once every three or four months.

[beltim]

Not sure about the subject question, but...
...what about direct deposit of the state funds into "something else" (checking/savings/Vanguard Money Market/whatever) and then fund the IRA with automatic deposits from the "something else"?

That's what we have been doing for several years.  Depositing into a dedicated savings account, and then automatic transfers to other accounts.  We have discovered that this second set of scheduled/automated transfers is 'buggy' at best, and often fails in ways that it should not.  Unwinding the screw-ups has become enough of a regular aggravation that, when it happened again this morning, we agreed that this system wasn't working out for us.  So we are now investigating other ways to automate our finances.  Thinking about it, I'd say something goes wrong that costs us money and/or time to fix about once every three or four months.

Use a better bank.  This is a trivially easy task, and none of my banks have ever messed it up.

[MoonShadow]

Not sure about the subject question, but...
...what about direct deposit of the state funds into "something else" (checking/savings/Vanguard Money Market/whatever) and then fund the IRA with automatic deposits from the "something else"?

That's what we have been doing for several years.  Depositing into a dedicated savings account, and then automatic transfers to other accounts.  We have discovered that this second set of scheduled/automated transfers is 'buggy' at best, and often fails in ways that it should not.  Unwinding the screw-ups has become enough of a regular aggravation that, when it happened again this morning, we agreed that this system wasn't working out for us.  So we are now investigating other ways to automate our finances.  Thinking about it, I'd say something goes wrong that costs us money and/or time to fix about once every three or four months.

Use a better bank.  This is a trivially easy task, and none of my banks have ever messed it up.

Well, that's what we thought too.  We used to use a different bank for this, but they screwed it up pretty quick; so we changed it to the current bank, where it worked fine for a couple years.  At the start of the year, that bank was bought out by another bank, and they changed their name.  It's been since then that the issues have popped up.  Strange fees that are not explained, failed transfers, late transfers resulting in draft fees, etc.  It's not even a particularly complicated set of transfers.  I would have thought that a computer did this kind of thing anyway.