IRA Contribution Limits: Avoid Penalties & Maximize Retirement Savings

Your IRA contribution may vary annually depending on how much disposable income you have to apply to your retirement savings. Regardless of whether you carry a traditional IRA or Roth IRA, contributing too much may result in penalties.

Contribution Limitations for IRAs

Each year the federal government imposes a contribution limit for IRAs. Your contribution limit is based upon your age, income and marital status. Contributing too much to an IRA can result in tax penalties on the additional amount you contributed. Thus, its important to contribute only the proper amount each year.

For example, an individual who contributes $6000 to his IRA when then annual limit is only $5,000 will be expected to pay additional taxes on the $1000 he contributed over the limit. If he does not withdraw or otherwise correct the additional payment, the IRS will levy a penalty tax against the amount every year until he does so.

Traditional IRA Contributions May Result in Higher Taxes

Although the contributions you make to your traditional IRA are tax deductible, once you reach retirement age and begin withdrawing your investment, you’ll have to pay taxes on the amount you originally contributed and any additional money your contributions earned. If you have a traditional IRA, it may be in your best interest to make only small contributions. This is especially true if you plan to convert your traditional IRA to a Roth IRA in the future, since the IRS will expect you to pay taxes on the full amount contained within your traditional IRA before the conversion can take place.