How I saved too much for retirement
Posted on May 19th, 2008 – 2:13 PMBy Kara McGuire
I try to max out a Roth IRA each year. I like this type of account, which I’ve referred to as the little black dress of personal finance, because of its versatility. It’s designed for retirement, but since it’s an after-tax account, you can take your contributions out tax free at any time. That makes it a great save for emergencies, save for a big ticket item account.
Although, of course, if you have all of your money in aggressive stock funds, you could risk losing some of your principal and not having it available if you need it. So I have another smaller emergency savings account too.
Anyway, this weekend I received a statement for my 2007 contributions to my IRA. In 2007, you could contribute $4,000; this year it’s $5,000. You can contribute to an IRA for the prior year through tax day– aka April 15th. So my monthly contributions in January through March actually went towards my 2007 limit. Confused, yet?
So the statement said that I saved $4,000.95 for tax year 2007. But the max is $4,000. How annoying is that? I blame it on my mid-year attempt to save exactly $4,000 through dollar cost averaging. Clearly, I goofed on my math, which is no surprise since I often make tweaks to my finances at night when everyone else is asleep and I have the time, but not always the brain power.
I called A.B.C. mutual fund company and told them of my situation. The woman said she couldn’t tell me to do nothing on the recorded line, but that she’s never heard of the IRS flagging a return because a person saved .95 cents too much in a tax advantaged account.
If I wanted to, she would send out an excess contributions form, which would guide me through the calculations to determine how much I earned on that .95 cents and what penalty or taxes I would owe. That sounds time consuming on several levels.
With the contribution limits for IRAs indexed to inflation going forward, I hope that A.B.C and other fund companies that undoubtedly have thousands of customers who wish to max out their IRAs by automatically socking away a sum each month will streamline this process. Anyone know a company that does make this easy?
For those of you who want the whole excess contributions enchilada, here’s IRS Pub 590 .
8 Responses to "How I saved too much for retirement"
You could just write a check at the beginning or end of the year… yeah it’s a big chuck of change for most people but it makes it easier to hit that target.
Yeah, I suppose I could save the money up all year and put it in all at once or quarterly. But I prefer dollar cost averaging instead and think technology-rich financial services firms could figure out a way to calculate our payments for us and check a box to authorize them changing the auto withholding rather than me having to call or email or log on and do the math.
I divide the total contribution and round down to even dollar amount for dollar cost averaging. The difference I send an online check for the amount of the difference. For example, I dollar cost average $415.00/month which totals to $4980.00. The difference $20.00 I send as a separate amount at the beginning of the year.
Vanguard has a “maximize” feature. It assumes, though, that you are not catching-up as you did in 2008 with 2007 contributions. Here’s how it works. You set an auto-debit for 416/month in 2008 and then at the end of 2008 Vanguard will check to see if the 2009 amount is indexed higher…they send you a letter in November…and then automatically increase the periodic amount in January 2009. Their system assumes that you start in January with a level amount each period (month, quarter) and so therefore it’s not smart enough to know if you are trying to catch up or not.
There’s an easy way to lump-sum: simply plan for a tax refund. The earnings lost would be minimal (again, this assumes your forecast your refund and then dutifully invest this amount each month) and it will be easy to “give away” the money to your IRA when the IRS deposit hits.
You can even direct your IRS refund into an IRA account.
I believe the Vanguard site will accomodate varying date ranges. When setting up contributions you are forced to specify the contribution year. It also prohibits, as far as I recall, making any excess contributions. Its the only site I’ve used for managing Roth accounts, but am happy with it, managing both mine and my wife’s.
Ditto on Vanguard, I use it to manage my wife’s Roth and my sons’ UGMA accounts. Their site is very easy to use and their index funds are top-notch. I may even roll over the Fidelity Roth my dad set up for me - the Fidelity funds are decent but the ease of use is like night and day when compared to Vanguard. I go to the Fidelity site and I’m just LOST!
The IRS barely has enough time to chase down Robert Beale…I think you can let the .95 slide, Kara. 
I should correct my earlier statement. My wife’s Roth was originally with Putnam. Vanguard is a huge improvement, both in terms of functionality & investment options. (Just say NO to front-load funds. Or load funds at all)
