IRA Contribution

An IRA contribution is defined as a sum of money invested in a retirement plan, either by an employer as part of its benefits package or by an employee through a voluntary or employer-directed salary deferral plan. IRA contributions provide a solid financial base for retirement planning and in many cases offer significant tax benefits to account holders. However, there are a number of IRA contribution rules that must be followed in order to produce the best financial result from an IRA account. IRA contribution limits vary depending on the type of account, the source of the funds, and the age of the account holder.

IRA contribution rules


In general, IRA contribution limits for both traditional and Roth IRAs are set at $5,000 annually for 2010. These limits are increased by $1,000 for individuals over the age of 50; the additional amount is referred to as a catch-up amount, since it is intended to allow older individuals to “catch up” on their IRA contributions during the later years of employment.

IRA Income limits


The IRS sets income limits for participants in traditional IRA plans. These income limits are usually adjusted annually in order to account for current economic conditions. For 2010, single individuals or heads of household must earn an income of $56,000 or less in order to receive the full tax deduction on traditional IRA contributions if the individual in question is covered by an employer-sponsored retirement plan through their workplace. The tax deduction for contributions is gradually phased out and, at the $65,000 earnings level, individuals who also have employer-sponsored retirement plans receive no deduction for their IRA contributions. For married couples filing jointly, the combined income limits to receive the full deduction amount is $89,000; couples making more than $109,000 receive no deduction for their IRA contributions. For individuals and couples that lack employer-sponsored retirement coverage entirely, no income limits are imposed in order to receive the full IRA deduction.

Excess IRA contributions


On occasion participants in IRA plans may discover they have made excess IRA contributions over and above the amount allowable by IRS regulations. If this discovery is made in the tax year that the contributions were made, the excess IRA contributions can be withdrawn without penalty up until tax filings are due for the year in question, typically by April 15th. If, however, the excess IRA contributions are not discovered until after that date, a significant tax penalty may apply to the excess contributions. For this reason, it is essential that individuals consult the tax code carefully as it applies to IRA contributions to ensure that they do not exceed the allowable contributions for a given calendar year.
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