IRA Contribution Limits

IRAs or Individual Retirement Accounts have annual IRA contribution limits that you cannot exceed. An IRA is your retirement nest-egg, and it’s an account that you will contribute to each year. It keeps growing and you can use it to buy investments and make it grow even faster. There are 2 types of IRA accounts, the traditional and the Roth, and each has its benefits and its limitations.

As a contributor, you will need to consider both of them to see which one will suit you best. You also need to consider your income and how much you can comfortably contribute each month. Remember it’s a retirement fund and withdrawing from it comes with penalties (though not very stiff). To encourage contributors, they come with tax advantages.

You are encouraged to have an IRA account. Retirement does not happen just because you are old. You could get sick or injured and not be able to work any more and this would force an early retirement. If you have an IRA, you are buffered for the future.

Why would IRA contribution limits be on a retirement savings account?

This is to discourage wealthy people from taking advantage of the account and the tax benefits. A wealthy person may choose to use this account because of the tax reprieves it offers to stash away his cash, giving him unfair advantage over the rest of the population. The limits are to eliminate this kind of opportunism.

The accounts can only take money that is earned from employment and not investment income. This means that for you to have an IRA you have to be filed as employed.

How have the IRA contribution limits changed over the years?

The changes are influenced by government policy. They may remain the same from year to year or the government can decide to increase them. The increments are usually in amounts of $500. In 2009, the contribution limit was $5000. This has been revised because of inflation. Inflation erodes the buying power of money, and if the contribution rate remains the same through-out, you may find that in the end, your nest-egg is barely enough. To match inflation the government will increase the IRA contribution limits.

There is also an age consideration. If you are older and start saving much later, you will have a higher contribution limit. If you start after 50, you can contribute annually up to $6000. You should however not wait until you are older to start your IRA account because you will contribute for a much shorter time before you are retired and end up with less despite the higher limit.

The ideal is to start contributing as soon as you are employed and do so consistently each year. Remember the funds in your IRA account can be used for different investments, so starting to contribute early gives you the chance to maximize on these investments.

How are the contributions tracked?

Through your bank account! They come directly from there. Once your salary is credited into your account by your employer, there is an automatic deduction that sends a certain amount to your IRA account. This contribution cannot exceed the IRA contribution limits that have been set for that year. Since the IRA contributions are tax deductible, you will be able to file for tax returns at the end of the year.

What happens if you should exceed the contribution limit? You will be penalized – you have to pay a 6% penalty for it. The penalty is calculated from the excess contribution.

For couples, you make the limit together – both of you can only contribute to the limit, not each of you. If one of you is over 50, you are allowed the higher cap, which means you can both contribute up to $6000.

It is important to know about IRA contribution limits because then planning your finances is easier and you will be able to stick to regulation.