Individual Retirement Accounts (IRAs) are essentially tax-deferred savings plans. Their purpose is to help working people prepare for future retirement. The IRS has very specific guidelines governing these types of savings plans, which means there are requirements and limitations which must be adhered to. One very important aspect of an IRA that is limited by the IRS deals with contributions to the account. Understanding IRA contribution limits will help you to make the most of your investment.
Two categories of Individual Retirement Accounts
There are four types of IRAs, divided into two categories: those established by the individual employee and those made available through the employer. Individual IRAs are the traditional IRA and Roth IRAs. Employer sponsored IRAs include the Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE).
What is an IRA “contribution?”
IRAs are simply a type of savings account, to which monetary contributions are made by placing funds into the account. Contributions to an IRA must be made in cash. Each different type of IRA has its own annual limit on contributions. There are also deadlines on when contributions must be made. Further, there are conditions that must be met before contributions can actually be made.
Deadlines and maximum contributions
In 2015, the maximum contribution for both Traditional and Roth IRAs is $5,500, if you are less than 50 years of age, and $6,500 if you are over 50. The current deadline for making contributions is April 15th, corresponding with the income tax filing deadline.
The maximum contribution for a SEP IRA, which is much higher, is $53,000 in 2015. The deadline is also April 15th, unless you request and receive an extension. The maximum contribution for a SIMPLE IRA is $12,500 if under age 50 and $15,500 if over age 50, with the same April 15th deadline.
Additional contribution restrictions
There may be other restrictions, depending on your particular situation. For instance, you cannot make contributions to a traditional IRA if you are age 70 ½ or older. However, this age restriction does not apply to Roth IRAs. If your contributions exceed the limitations, the excess amount will be taxed at 6% each year, as long as that excess remains in the IRA.
How do excess IRA contributions occur?
Excess IRA contributions typically occur in one of the following situations:
- You contribute more than the contribution limit.
- You make a regular IRA contribution to a Traditional IRA at age 70½ or older.
- You make an improper rollover contribution to an IRA.
In order to avoid this tax on excess contributions, you can withdraw the excess amount from the IRA before your individual income tax return is due, as well as income earned from that excess contribution.
If you have questions regarding IRAs, or any other retirement planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.
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