Ira Information

IRA Contribution Limits-Some Details

A lot of people take up IRA accounts as a tax planning measure. Considering this the government of the United States has put up some IRA contribution limits. Certain highly compensated employees also have to observe IRA contribution limits because the government wants to ensure that not too much of tax evasion (such as in the case of traditional IRA) takes place if the rank and file of the company is saving less, the highly paid employee will also be saving lesser money. You must be aware of the limits that are applicable to IRA contributions. It is good to know about them because crossing IRA contribution limits results in tax and penalty. You must also keep in mind that there are different IRA contribution limits applicable depending upon your age group and the type of plan you have opted for.

Realizing that the people of United States rely very much on IRA not only for tax benefits but also for the actual purpose of the IRA (which means that they want to save money for the dusk of their lives), the federal government has decided that the IRA contribution limits be revised on regular basis to make up for the growing inflation figures. This has allowed the government of United States to take away the extra burden on the various social security schemes.

The IRA contribution limits in a traditional IRA for the year 2006-2007 were $4000 or 100% of income, whichever was less. For people above the age of 50 years, the limit was $5000. This was called a 'catch up' mode. If you are already contributing to any pension plan under section 501 (c) (18) which is funded entirely by your contributions, then your IRA contribution limits get reduced further. This is because IRA contribution limits apply on total amount contributed. The number of IRAs you have is not counted. Traditional IRA contribution limits also apply to people who file a joint return along with their spouse. For the individual with the lower earning the traditional IRA contribution limits are restricted to whichever is lower of the following:

1. $4000 ($5000 if you are in catch up mode). 2. Total compensation which can be included in the combined gross income of both partners, minus the Traditional IRA contribution of spouse earning more and the contribution of spouse to Roth IRA.

Roth IRA contribution limits are a bit different. The Roth IRA contribution limits for 2006-2007 were $4000 for individuals aged 49 and less. The people aged 50 years and more can contribute $5000. These IRA contribution limits are further subject to the Modified AGI of the person.

Failure to comply with IRA contribution limits will result in a penalty of 10%. The Traditional IRA holders can adjust the excess amount after paying the penalty to next year's IRA contribution limits.