How Much Is Allowed Yearly for an Individual IRA?
Individual IRAs, such as traditional IRAs and Roth IRAs, offer income tax savings to promote retirement savings. However, the Internal Revenue Service limits the amount that can be contributed to your IRA on a yearly basis. Knowing the limits, as well as the penalties for exceeding your limits, will help you make wiser retirement planning decisions.
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Maximum Contribution Limit
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The maximum contribution you can make yearly to an individual IRA changes with inflation. The IRS adjusts the amount on an as-needed basis. For example, in 2011, you can put in up to $5,000 into all of your individual IRAs. This limit applies to your total annual contributions, not your total per account. For example, if you have a traditional IRA and a Roth IRA, your maximum contribution equals $5,000 and you put $4,500 into your traditional IRA, you can only contribute $500 to your Roth IRA.
Adjustments
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The IRS lowers your limit if you have less earned income than your yearly contribution limit. For example, if you could contribute $6,500 but you only have $3,400 in earned income, your contribution limit equals $3,400. Earned income include your paychecks but not interest, dividends or capital gains. If you are 50 or older, you can make a larger contribution because of your eligibility to make a catch-up contribution, as long as you have the earned income needed. As of 2011, the catch-up contribution equals $1,000.
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Using Your Spouse's Income
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If your spouse has more earned income than the yearly individual IRA contribution limit, you can use your spouse's excess to make a contribution on your behalf if you do not have earned income of your own and you file a joint tax return. For example, if you stay at home with the children, you would not be able to contribute to an IRA because you have no earned income. However, if your spouse works and has earned income, that earned income can count towards making you eligible to contribute to your own IRA.
What If You Contribute Too Much?
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If you put too much in to an individual IRA, you can correct the excess by withdrawing the extra contribution, plus any earnings on the excess contributions, before you have to file your income tax return. The deadline includes tax extensions. For example, if you receive a six-month extension, you have until Oct. 15 to remove the excess. If you do not get the excess contributions out in time, you must pay a 6 percent excess contributions penalty, figured with IRS Form 5329.
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