How to Avoid Penalties for a Return of IRA Contributions

There are two different types of IRA's, the Roth IRA and the Traditional IRA. There is a maximum contribution limit each year and if you are over the age of 50 you can make additional or catch up contributions. On a Traditional IRA all interest, dividends and capital gains are tax-deferred until the money is withdrawn and the advantage to a Roth IRA is that you pay taxes up front only.

Difficulty: Moderate

Instructions

1. Correct an excess contribution by using a specific formula to determine the amount to remove by the owner's tax-filing deadline to avoid this penalty.

2. File an amended return by April 15th if you overstated your traditional IRA contribution to avoid this type of penalty.

3. Make a contribution to your IRA by April 15th if you have some remaining deductible contributions left. By doing so your actual contributions will match what you have already reported.

4. Withdraw funds from a traditional or a Roth IRA to pay for college or higher-education expenses at anytime without penalty.

5. Buy a home for the first time only and use your IRA contribution without paying any penalties.

6. Rollover IRA contributions are an investment option for individuals leaving their current employment and who are active participants of a qualified employee retirement plan. They can move their IRA contributions to a separate IRA within 60 days without experiencing any penalties.

Tips & Warnings

• Do not withdraw money from your IRA before the age of 59 1/2 or you will have to pay regular income tax on the withdrawal plus a 10 percent penalty tax.

Resources

• Visit IRS.gov for information about IRA penalties