Everywhere one goes in the financial arena, the resounding
chorus is that people should save more for retirement while they can. While
saving is a good thing, the federal government has put a cap on exactly how
much can be saved annually.
Every year the Internal Revenue Service updates and notifies
the general public of how much can actually be deposited in an individual
retirement account by an individual. Otherwise known as IRAs, these accounts
provide legal tax shelters for funds dedicated to retirement versus generic
savings. The nature of the tax shelter depends on the nature of the money
deposited. All earned income is subject to payroll taxes. If the money is
pre-tax, then placement in an IRA defers the payroll taxes until a later date.
If the money is post-tax, it represents funds after payroll taxes have been
taken out. Whether it be a traditional IRA which is for pre-tax money, or in a
Roth IRA which is for post-tax monies, the most a person can deposit in 2013
and 2014, respectively, is $5,500. However, if a person is 50 years or older, a
catchup provision allows a higher individual amount of $6,500. An exception to
both is if a person has earned less than these figures in a year. Then the
deposit limit is capped at the lower amount.
It’s important to note spousal IRAs can help make up for a partner
not working an unable to deposit. In this case one partner earns all the
income, but can deposit to both her own IRA as well as a separate IRA for the
Some people cannot deposit into an IRA at all. Both types of
retirement accounts have restrictions for higher-income earning people,
essentially phasing out their ability to deposit in a calendar year the more
money that is earned above the threshold. That phase-out period begins at
$112,000/year and turns into a complete restriction from depositing at
$127,000/year in 2013. Married couples have a more room to work with starting
at $178,000/year and ending at $188,000/year.
Further, with a traditional IRA, a depositor can no longer
add more money to the balance after age 70 ½ years. Instead, the IRS requires
such individuals to begin taking money out of the account, which is known as a
minimum required withdrawal. This is how the IRS ensures the pre-tax funds are
eventually charged for income tax. After that, the net amount can be deposited
anywhere, including a Roth IRA. Rollover contributions are not affected by this
The above deposit limits do not apply to rollover
contributions. This occurs when a person takes monies in one type of retirement
account and transfers it to another. That said, unless the accounts are the
same type, payroll taxes could apply on the transfer amount. This is why it’s
smart to rollover to a similar account, i.e. a pre-tax 401K balance rolled over
to a pre-tax traditional IRA.
The other exception to the above limits involved qualified
reservist repayments. These funds can also be deposited without worrying about
an IRA cap.
Where deposits exceed maximum contributions, the IRS will
receive a report from the IRA administrator entity, which then triggers
penalties. Far more detail on related penalties as well as
maximum limits can be found in IRS Publication 590, including how withdrawal
taxes apply or not.