Contribution Limits or Forced Withdrawals with IRAs
Written by Tina Phu
Along with qualifications for opening an IRA and Penalties for early withdrawals, there are also contribution limits and forced withdrawals you need to be aware of.
Traditional IRA
The traditional IRA allows you to contribute up to $5000 a year (in 2008) if you are under the age of 50. If you are age 50 or above, you may contribute up to $6000 a year. This amount may be higher if you had a 401k plan under an employer that went bankrupt earlier in the year.
Contributions are with pre-tax compensation, and growth within the account is subject to taxation.
You may not contribute more than your gross annual income. For example, if you earned $3000 in one year, you may only contribute up to $3000 to your traditional IRA account.
Starting at age 70 ½, the owner of the account is forced to make withdrawals from the account. If you do not make a withdrawal when required to, the IRS may confiscate half the amount of that withdrawal.
Roth IRA
Contributions are made with after-tax income.
Growth within the Roth IRA and withdrawals from the account are not taxed.
The Roth IRA allows you to contribute up to $5000 a year (in 2008) if you are under the age of 50. If you are age 50 or above, you may contribute up to $6000 a year. This amount may be higher if you had a 401k plan under an employer that went bankrupt earlier in the year.
Contributions are with pre-tax compensation, and growth within the account is subject to taxation.
You may not contribute more than your gross annual income. For example, if you earned $3000 in one year, you may only contribute up to $3000 to your Roth IRA account.
Simple IRA
You may contribute up to $10,500 to your SIMPLE IRA. For those ages 50 and over, the limit is $13,000.
Contributions from your employer cannot exceed 3% of your compensation. Your employer can choose to reduce this percentage to a percentage no lower than 1%. This reduction cannot last for more than 2 years out of the last 5 years of the period of the plan. The employee must be notified of this decision during the 60-day period before the employee enters a new salary reduction arrangement.
Your employer has the option of making a non-elective contribution. Non-elective contributions are those made on behalf of all SIMPLE-eligible employees that do not match any specific contribution. The employer must notify employees that this election was made, and the contribution is limited to 2%.
Simplified Employee Pension (SEP) IRA
The SEP IRA allows the employer to contribute up to 25% or $45,000, whichever comes first, of the employee’s compensation to the employee’s retirement fund. Only the employer contributes, not the employee.
You or your employer may choose the financial institution as the trustee/custodian.
The SEP IRA can be set up for those who are self-employed, even if the employer is under another business’ retirement plan. However, the contribution limit in this case would be 18.587%.
