What Is an IRA Contribution Limit?
An individual retirement account, or IRA, is one of the best retirement savings vehicles. If you have income from wages, you can contribute to a regular IRA and get an immediate tax deduction. You can also choose to invest in a Roth IRA, giving up that tax deduction but gaining the advantage of tax-free withdrawals in retirement.
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Younger Workers
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For 2011, workers who are 49 years of age and under can contribute up to $5,000 to either a traditional or Roth IRA. The amount of that contribution must be covered by the worker's earned income; unearned income like dividends and interest cannot be contributed to an IRA account. Workers can make their annual IRA contributions as early as Jan. 1 or as late as the regular tax filing deadline, typically April 15.
Older Workers
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The IRS allows older workers to contribute extra money to their IRA accounts. This catch-up contribution is designed to let older workers make up for time they may have missed and help them build the nest eggs they will need when they retire. As of 2011, workers who are 50 years of age and older can contribute an extra $1,000 to their IRA accounts, for a total contribution of $6,000.
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Income Considerations
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If you are in the upper income tax brackets, you might not be able to make a contribution to your IRA account. If you are a moderate to high income earner, you should check the Internal Revenue Service website for the current income limits before you make your contribution for the year. If you make a contribution before you have all your income information, you may have to remove those contributions later on or face a tax penalty.
Excess Contributions
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If you make a contribution to your traditional or Roth IRA and later find that you were not eligible due to too high an income, the IRS considers this an excess contribution. You will be assessed a tax penalty on those excess contributions until you remove them. You must remove not only the original contribution, but also the earnings that the money has made in the interim. Your accountant or tax preparer can help you determine how much you need to withdraw to correct an excess contribution.
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References
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