The Reason Behind IRA Contribution Limits

December 2 2011No Commented

Categorized Under: News

IRAs or Individual Retirement Accounts have annual IRA contribution limits that you can't exceed. An IRA is your retirement nest-egg, and it is an account that you will make a contribution to each year. It keeps growing and you need to use it to buy investments and make it grow even quicker. There are 2 types of IRA accounts, the standard and the Roth, and each has it's benefits and its constraints.

As a contributor, you will need to think about both to see which one will suit you the best. You also have to consider your revenue and how much you can nicely contribute every month. Remember it is a retirement fund and withdrawing from it comes with penalties (though not very stiff). To prompt contributors, they come with tax advantages.

You are prompted to have an IRA account. Retirement does not happen simply because you are old. You might get hurt or sick and not be able to work any more and this would force an early retirement. If you have got an IRA, you are buffered for the future.

Why would IRA contribution limits be on a retirement savings account?

This is to discourage successful people from taking advantage of the account and the tax benefits. A well off person may choose to use this account because of the tax reprieves it offers to stash away his cash, giving him unfair angle over the rest of the population. The limits are to get rid of this sort of opportunism.

The accounts can only take money that is earned from work and not investment revenue. This indicates that for you to have an IRA you have to be filed as employed.

How have the IRA contribution limits modified over time?

The changes are influenced by government policy. They may stay the same from year to year or the govt can decide to increase them. The increments are sometimes in amounts of $500. In 2009, the contribution limit was $5000. This has been revised due to inflation. Inflation erodes the purchasing power of money, and if the contribution rate stays the same through-out, you might find that in the end, your nest-egg is hardly enough. To match inflation the govt. will increase the IRA contribution limits.

There is also an age consideration. If you are older and start saving much later on you will have a higher contribution limit. If you start after 50, you can contribute yearly up to $6000. You must however not wait until you are older to start your IRA account because you will contribute for a far shorter time before you are retired and finish up with less despite the higher limit.

The ideal is to start contributing as quickly as you are employed and do so regularly every year. Remember the funds in your IRA account can be used for different investments, so starting to contribute early gives you the opportunity to maximize on these investments.

How are the contributions tracked?

Through your deposit account! They come right from there. Once your income is credited into your account by your employer, there is an automatic reduction that sends a specific quantity to your IRA account. This contribution cannot surpass the IRA contribution limits that have been set for that year. Since the IRA contributions are tax deductible, you'll be able to file for tax statements at the end of the year.

What will happen if you need to exceed the contribution limit? You'll be penalized “you've got to pay a 6% penalty for it. The penalty is worked out from the surplus contribution.

For couples, you make the limit together “you both can only contribute to the edge, not each of you. If one of you is over 50, you are permitted the higher cap, which means you can both contribute up to $6000.

It is important to know about IRA contribution limits because then planning your financials is easier and you will be able to adhere to regulation.

For more in-depth information on contribution limits and IRA CD rates visit my website. I provide info about making an investment in Jumbo CDs.

Leave a Reply

Your email address will not be published. Required fields are marked *