What Is an IRA Contribution Limit?

Individual retirement arrangements offer tax benefits for saving for retirement. The Internal Revenue Service, however, limits how much you can contribute to your IRA each year, limiting your tax benefits. The contribution limits are use-it-or-lose-it limits -- you can't make up for missed contributions in past years. You have until the standard tax filing deadline to make your annual contribution.

Annual Limit

The annual limit for your IRA contributions equals the lesser of your compensation or the general limit. The general limit changes periodically to adjust for inflation. For example, in 2013, the limits increased to $5,500 if you're under 50 or $6,500 if you're 50 and up. But, you need at least that much in compensation -- wages, bonuses, self-employment income and taxable alimony received -- to max out your contribution. If you have less compensation, that becomes your contribution limit.

Reduced Roth Limit

Your modified adjusted gross income might lower -- or even eliminate -- your maximum contribution to a Roth IRA. The MAGI limits can change on an annual basis like the overall contribution limits. For example, in 2013, your Roth IRA contribution limit starts falling when your MAGI surpasses $112,000 and is eliminated when you pass $127,000. If you're married filing jointly, it doesn't start declining until you hit $178,000 and doesn't totally disappear until you exceed $188,000.

Cumulative Contribution Limit

The IRA contribution limit applies to all the money you put in a traditional IRA or a Roth IRA combined. For example, if your contribution limit is $6,500 and you put $3,000 toward your traditional IRA, you can't put more than $3,500 to a Roth IRA. If your Roth IRA contribution limit is reduced because of your income, your overall limit isn't reduced. For example, say that instead of being allowed to contribute $6,500 to your Roth IRA, your income knocks down your Roth limit to $4,000. Your overall contribution limit is still $6,500 so even if you max out your Roth IRA contribution at $4,000, you can still put $2,500 in your traditional IRA.

Penalties for Exceeding

If you exceed the IRA contributions, the IRS hits you with a 6 percent tax penalty not only in the year of the excess contribution, but every year thereafter that you don't correct the excess contribution. For example, if you put in $5,000 more than you're allowed in the first year, you owe $300 in penalties that year. If you've made an excess contribution, correct it before your tax filing deadline by withdrawing the excess plus any earnings, and you won't owe the 6 percent penalty.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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