- How Does the 10 Percent 401k Tax Penalty Work?
- Tax Consequences of a Nondeductible IRA Distribution
- Can I Have More Than One SIMPLE IRA Account?
- How Much Penalty Do I Pay for Early Withdrawal of My 401(k)?
- Does an Early IRA Withdrawal Affect or Count for Income Tax Purposes?
- The Disadvantages of a Simple Pension Plan
Putting money into a retirement account saves you money on your current tax bill and builds a nest egg for your future retirement. But Internal Revenue Service regulations limit the amount of tax-deferred contributions you can contribute to retirement plans such as IRAs and 401(k)s. Limits are based on age, with persons closer to retirement age allowed to contribute more than younger individuals. Exceed these limits and you'll pay a penalty.
Limits Under Age 50
If you are younger than 50, the maximum amount you could contribute to an IRA, as of 2010, was $5,000, or the maximum of your total compensation for the year, whichever is less. If your employer offers a traditional 401(k) plan, you can contribute a maximum of $16,500, or up to the amount of your total compensation for the year. For a Savings Incentive Match Plan for Employees, or SIMPLE, 401(k), the limit is $11,500.
Limits Over Age 50
If you'll turn 50 or older in the year you make your contributions, the IRS allows you to make additional tax-deferred contributions, known as catch-up contributions, in recognition of the fact that you're closer to retirement age and may feel the need to sock away more funds. If you have an IRA, you can contribute an additional $1,000, for a total of $6,000, tax-deferred. Participants over 50 who contribute to a traditional 401(k) plan may contribute an additional $5,500, or $2,500 for a SIMPLE 401(k), provided the plan allows catch-up contributions. The IRS doesn't require employers to allow catch-up contributions.
It's your responsibility to keep track of your contributions and not exceed the contribution limits for your retirement plan. If you have more than one employer — for instance, you work for a company and you also have your own business — and each has a retirement plan, the total contributions to both plans can't exceed the IRS maximums for tax-free contributions. You have the option of making additional contributions above the maximum, but those contributions will be taxed and you'll need to keep good records so that you don't pay taxes again on that portion of your funds when you withdraw the money after retirement.
If you find you've contributed too much to your retirement fund, you can request that your plan return the excess to you. But in order to avoid paying taxes on the excess contributions, you must request the refund before April 15 of the following year. If you try to withdraw the excess after April 15, you'll have to pay the 10 percent penalty the IRS assesses on all early withdrawals from retirement accounts, as well as the tax on the amount you withdraw.