Beware of Breaking Your IRA’s Contribution Limit
If you can increase your IRA every year, you are in good shape. You not only save on your future; you also benefit from the IRA tax credit. Because of this advantage, the IRS has strict rules on how much you can deposit. Be careful not to exceed their limit because you will be punished.
For 2015, the traditional IRA and Rota contribution limit will be the lower of the following:
- $ 5,500 (or $ 6,500 if you are 50 or older by the end of the year); or
- Your taxable compensation for the year.
Exceed this amount and you will receive a 6% penalty. “It accumulates every year until you withdraw the excess contribution,” explains Forbes. They add that you have up to six months after the April 15th deadline when your taxes are due for that year.
According to the IRS, the fine averages $ 131 per taxpayer . It might not sound like a lot, but Forbes notes that this is a problem that recurs every year. People tend to over-contribute when transferring an IRA from one firm to another when they reach the distribution age. Joe Chicinelli, IRA technical expert, explains:
In the year you turn 70 ½, you will no longer be eligible to contribute to a traditional IRA (there is no age limit for contributions to a Roth IRA, provided you have earned income). A common mistake is transferring an IRA from one bank or brokerage company to another without first removing the required minimum distribution amount for the calendar year (you should start receiving payments a year after you turn 70.5), says Chichkinelli. Any distribution outside the IRA is considered the minimum required distribution and cannot be renewed, so you contributed unnecessarily. If you have collected more than $ 100,000, but should have received the minimum distribution of $ 10,000 first, then you have made an additional contribution of $ 10,000. “The argument that you don’t need to cancel the minimum allocation before December 31st does not cut it,” he adds.
The IRS is actually working on a solution to this problem, but in the meantime, this is something to watch out for. Read more in the full Forbes post.
The Dangers Of Overflowing Your IRA | Forbes