If you contribute to an employer-sponsored retirement plan or on your own in an annuity and IRA, then you’ve likely been bombarded with information about contributions, their limits and tricks on how to maximize their potential. While it may be instinct to want to fill these accounts as much as possible, it is also possible to overstuff them and not maximize each account’s potential.

                By                    Georgina Tzanetos

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IRAs are one place where investors can easily over-contribute. Contributions to an IRA or Roth IRA require you or your spouse to have earned income like wages, bonuses, tips or self-employment income. You will also need to be below the income thresholds of $125,000 to $140,000 for single filers and $198,000 to $208,000 for married couples filing jointly.

One of the biggest risks with IRA contributions is that people do not realize there is a yearly limit on the amount of money that can be invested. For 2021, this limit is overall $6,000 with a catch-up contribution of $1,000 for people 50 and over. The catch — this is the contribution limit for ALL IRA accounts you have, meaning you cannot contribute the maximum amount into two IRAs in one year but you can split $3,000 and $3,000 amongst the two.

Over-contributing can land you in trouble with Uncle Sam. Regardless of the tax advantages of these retirement accounts, if you exceed the limit, you might face a penalty. A 6% penalty can be applied for each year the excess contribution stays in the account, so it’s important to withdraw any excess amounts you have made this year as well.

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An alternative to these accounts, if you want to invest more and enjoy tax advantages, is an annuity. Annuities are separate investment products with their own set of rules, and most importantly, vesting schedules and periods where you will not have access to your money. Some annuities tie your money up for seven years or more, so it’s important to find the product that fits your investment timeline and risk tolerance suitably. From there, annuities can act as great tax-advantaged investment vehicles as a supplement for the extra cash you otherwise would’ve plopped into an IRA or 401(k).

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