IRAs are tax-deferred savings plans, to help working individuals become prepared for their future retirement. These savings plans must be established and operated in compliance with IRS guidelines. With that said, there are certain requirements and limitations that have been put in place. One specific element of an IRA that has limitations relates to contributions. A common question that clients ask is “what are the IRA contribution limits?”
Getting familiar with the different types of IRAs
There are four types of IRAs: Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE). The first two are established by the individual and the last two are made available through your employer.
What is a “contribution?”
Because an IRA is a type of savings account a contribution is the money that is placed into that account. All contributions must be made in cash. Each type of IRA has its own annual contribution limits, as well as deadlines for making contributions. There are also requirements that need to be met before a contribution can be made. But, keep in mind that contributions are always made at your discretion, meaning that you are not required to make a contribution every year.
Maximum contributions and deadlines
In 2014, the maximum contribution for both the Traditional and Roth IRAs was $5,500 if you were under age 50 and $6,500 if you were over 50. These limitations did not change for 2015. The deadline for making your contributions is April 15th, to coincide with the income tax filing deadline. The contribution maximums for a SEP IRA are much higher. In 2014, the maximum was $52,000. Next year, the limit will increase to $53,000. The deadline is also April 15th, unless you receive extensions.
In 2014, the maximum contribution for a SIMPLE IRA was $12,000 if under age 50 and $14,500 if over age 50. In 2015, the maximum increases to $12,500 and $15,500. The same April 15thdeadline, plus extensions, applies.
Other Contribution Restrictions
There are a few other restrictions to contributions that may apply to your situation. For example, you are not allowed to make contributions to a Traditional IRA once you have reached the age of 70 1/2. That restriction does not apply to a Roth IRA. Also, if you make contributions in excess of the set limitations, those contributions will be taxed at 6% per year as long as the excess amount remains in the IRA. An excess IRA contribution can occur in the following situations:
- You contribute more than the contribution limit.
- You make a regular IRA contribution to a Traditional IRA at age 70½ or older.
- You make an improper rollover contribution to an IRA.
To avoid being taxed for excess contributions, simply withdraw the excess amount from your IRA by the due date of your individual income tax return (including extensions), as well as any income earned on the excess contribution.
If you have questions regarding IRAs, or any other retirement planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.