IRA Contributions And Their Limits

Individual Retirement Account, or IRA as it is commonly known, is a type of retirement savings plan. In this plan a working individual can contribute money which grows tax deferred till the time of withdrawal. However, the earnings on these contributions are totally tax free. An earning individual can also set up an IRA account for a non working spouse.

A person can invest money in these accounts irrespective of the fact that whether he/she already has another retirement plan running. But the maximum contributions that can be made to this account are regulated by the government. Heavy penalties can be levied if an individual crosses the maximum limit of contribution. However, these limits may change according to the guidelines issued by the federal government. Government generally changes these limits based on the annual rate of inflation. From the year 2008 onwards this limit would be increased by around $500 per year. The maximum contribution limits for the past few years are as follows-

* Year 2005 - $4,000 * Year 2006 - $4,000 * Year 2007 - $4,000 * Year 2008 - $4,500

If a person has more than one IRA account then this limit is applicable to the combined contributions of all such accounts. If a person contributes towards an annuity under an IRA plan then also the maximum ceiling for the contributions remains the same. In case a person contributes more than the permissible limit, the annuities are canceled.

However, for the year 2007, people over 50 years of age can contribute $1,000 more than common people. This extra limit is referred to as the catch up limit. This allows elderly people to save more for their retirement. However, this maximum limit can be reduced for those people who are also contributing to 501(c) (18) plan (a type of pension plan established before 1959).

If a person participated in an employee sponsored 401K plan and the employer filed for bankruptcy then the employee can contribute some extra funds in one's IRA. The maximum limit for such a contribution is $3,000. However, certain conditions have to be fulfilled before an employee can make such contributions. If a person files joint returns for IRA, then he/she can contribute a maximum of $4000 for the year 2007.

In a particular year an employee maybe unable to contribute the maximum amount possible before the due date. In such situations, he/she can not contribute the extra amount to make up for that deficiency after the due date.

In case of contributions over reaching the maximum limits, the extra amount maybe used to fund the next contribution. A penalty, however, may apply in such a case.

Therefore a person should invest wisely while keeping in mind the contribution limits, otherwise penalties may be levied by the federal government.