It can be difficult to keep up with all of the rules governing IRA accounts. A couple of the biggest questions are usually “what are the IRA withdrawal rules” and “what are the IRA contribution limits right now”. Here is what I was able to find:
IRA Contribution Limits
Whether you invest in a Roth IRA or a Traditional IRA, they have the same IRA contribution limits. In 2011, they both allow their account holders to make a contribution of up to $5,000 per year if they are under the age of 50. Individuals over the age of 50 are allowed to contribute and additional $1,000 annually due to the catch-up provision.
Single tax filers are eligible to make some form of contribution as long as their adjusted gross income is below $122,000. Married joint filers cannot make any contributions if they make $179,000 or more.
IRA Withdrawal Rules
The withdrawal policies of a Roth IRA are different than the withdrawal policies for a Traditional IRA since Roth IRA’s are funded with after-tax cash. A Roth IRA account holder can withdraw their own contributions at any time, but the earnings made on those contributions are a different matter.
Earnings in a Roth IRA account can only be withdrawn penalty-free if you have a “qualifying reason” for that distribution and you have had your Roth IRA open for more than 5 years. If you do withdraw your earnings before age 59 1/2 with no qualifying reason or less than 5 years from when you started your Roth IRA, there is a 10% penalty on top of regular income taxes.
Since Traditional IRA’s allow you to make tax deferred contributions, you will have to pay taxes on any withdrawals that you make. Period. Withdrawals taken before the age of 59 ½ are subject to a 10% IRS penalty and the regular taxes must be paid.
Of course, there are some exceptions for both Roth and Traditional IRA’s. Some examples of those exceptions could be early withdrawal for medical expenses, educational expenses, or even for buying your first home.
My Own IRA Contribution and Withdrawal Plan
My husband and I contribute to two Roth IRA’s. Our current plan is to fully fund both of those accounts for the next 25-30 years. We started one in 2007 and the other in 2010, so we aren’t even past the 5 year mark with either account yet.
We are also trying to avoid the early withdrawal penalties the easy way – by not touching the money until we are 59 ½. Of course, life is amazing at getting in the way of the best laid plans. If something awful does pop up, hopefully our cash reserves and stocks will save us from having to touch our retirement accounts. If we do have to make early withdrawals, we may look into taking out a loan on my 401(k) instead. At worst, we would only withdraw our contributions penalty-free from the Roth IRA’s.
Knowing the rules concerning IRA contribution limits and IRA withdrawal limits may help you to get the maximum benefit from your retirement accounts while avoiding mistakes that could force you to pay penalties.
Do you have an IRA? What are your long-term plans?
Crystal Stemberger uses Budgeting in the Fun Stuff to write about finding the balance between paying your bills, saving for your future, and budgeting in the fun stuff along the way.