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If you can fully fund your IRA each year, you're on track. Not only are you saving for your retirement, but you're also benefiting from the tax advantages of an IRA. Because of these perks, the IRS has strict contribution rules. Make sure not to exceed the limit, or you'll face penalties.
For 2015, the contribution cap for traditional and Roth IRAs is the lesser of:
$5,500 (or $6,500 if you're 50 or older by the end of the year); or
Your taxable compensation for the year.
Exceed this limit, and a 6% penalty will apply. This penalty continues to accrue each year until you withdraw the excess contribution, according to Forbes. They note that you have until six months after the April 15th tax deadline to correct the excess.
The IRS states that the penalty averages $131 per taxpayer. While it may seem minimal, Forbes highlights that this issue often recurs annually. A common mistake occurs when people roll over an IRA between firms after reaching the distribution age. Joe Cicchinelli, an IRA expert, explains:
Once you turn 70 ½, you can no longer contribute to a traditional IRA (however, there are no age limits for Roth IRA contributions, as long as you have earned income). A frequent error is performing an IRA rollover between institutions without first taking the required minimum distribution for the year (distributions must begin the year following your 70 ½ birthday), according to Cicchinelli. Any IRA distribution counts as a required minimum distribution and cannot be rolled over, leading to an excess contribution. If you rolled over $100,000 but should have taken a $10,000 distribution, you've made a $10,000 excess contribution. Cicchinelli adds, 'The argument that you don’t need to take the distribution until December 31 doesn’t hold up.'
The IRS is working to address this issue, but for now, it remains something to watch out for. For more details, read the full post on Forbes.
Photo by Bark.
