Repairing the Potential Damage of Excess IRA Contributions

Your IRA contributions are limited to an annual maximum set by the IRS on a yearly basis. In 2010, this maximum is $5,000 for an individual under the age of 50 and $6,000 for anyone over 50. If you contribute more than your maximum, you will not be able to receive tax benefits on the additional funds. In fact, the IRS will assess a tax penalty against those funds in your account. Be certain this does not occur with your IRA.

Know Your Annual Maximum

The first step to avoiding excess contributions is knowing your annual maximum. Check with the IRS website each year to ensure the maximum has not changed. You will find the maximum for an IRA contribution is much more straightforward than with a 401k contribution. Simply make a note of this maximum, and plan your taxes accordingly. This is the most you can declare as a deduction on your income. Of course, if you are contributing to a Roth IRA, you will contribute post-tax dollars, so you will not be deducting any contributions. The limits still exist for Roth IRAs as well, so it is still essential to know the maximum.

Track Your Deposits

Track your IRA deposits on a tax spreadsheet each year. You should be inputting your anticipated deductions onto a tax spreadsheet for your benefit. This way, at year's end, you do not need to scramble for all of your deductions. In a category for retirement savings, enter the date and amount you have contributed. Keep a running total over the year. Know when your total is approaching the maximum, and stop putting funds in the account when you have reached your limit. Even if your account depreciates, you cannot add more funds. This is a contribution limit, not an accumulation limit.

Set up an Alert with Your Plan Provider

As a fail safe, notify your plan provider to set up an alert. Ask your provider to give you a monthly statement on your contributions and how close you are to your contribution limit. If you have gone over your limit, ask your provider to immediately notify you by phone and mail so you make take appropriate actions. This will ensure that you have a method in place for your protection just in case your personal accounting method fails you at some point in the future.

Withdraw Immediately

At times, even the best laid plans for managing contributions cannot stop an excess contribution from occurring. For example, you may contribute in excess by rolling over a Required Minimum Distribution (RMD) instead of taking it out of your account. This is one area where many older individuals do not know the law. If it happens that you contribute in excess, do not panic. You have until the time you file your taxes to correct your error. Make a withdrawal of the excess funds. This does not count as an early withdrawal because the funds have not yet been given their unique tax status by the IRS. Simply take out the funds and invest them elsewhere.

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