Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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What happens to contributions exceeding the Roth IRA income limit?

  1. They are allowed with penalties

  2. They are refunded

  3. They are taxed heavily

  4. They are credited to the following year

The correct answer is: They are refunded

When contributions to a Roth IRA exceed the income limit set by the IRS, the funds in excess are generally subject to specific treatment. The correct answer highlights that these contributions are refunded. This means that the excess amount must be withdrawn from the Roth IRA in order to avoid penalties associated with exceeding the contribution limits. The IRS imposes these limits to ensure that the benefits of Roth IRAs are targeted towards individuals within certain income brackets. If the excess contribution is not removed, it may incur a 6% penalty on the amount exceeding the limit for each year it remains in the account. The crucial aspect here is the need to take corrective action by withdrawing the excess contributions to avoid any additional penalties and to maintain compliance with IRS rules governing Roth IRAs.

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