Individual retirement arrangements allow individuals to designate savings for retirement, in addition to any employer-sponsored retirement plans, such as a 401(k) plan. There are smaller limits associated with IRAs compared to most employer-sponsored plans. Additionally, individuals may be eligible to receive tax deductions for the contributions they make to IRAs.
If you contribute more than the limit, or find that you overextended yourself financially and you wish to recoup some of the contributions you make to your IRA, you may be eligible to do so, provided you meet certain requirements.
What Is an IRA?
An IRA is a savings account that an individual voluntarily establishes. These accounts receive tax benefits because they are designated for that individual’s retirement. Traditional IRAs allow you to deduct some or all of your contributions, depending on your modified adjusted gross income, while you make Roth IRA contributions on a post-tax basis.
What's the Maximum IRA Contribution?
Because you may receive a deduction for some or all of the contributions you make, federal law has limited the amount you can contribute to your IRA. In 2021, you may contribute up to $6,000 to an IRA. If you are over 50, you are eligible to make additional contributions, called catch-up contributions. For 2021, you may make an additional $1,000 contribution. These amounts are adjusted from time-to-time to reflect cost of living increases.
Also important to note is that you may not contribute more to an IRA than you made in income during the tax year. For example, if you only made $5,000 you can't contribute more than $5,000.
Can You Reverse IRA Contributions?
If you made a contribution to your IRA, either traditional or Roth, you can withdraw that contribution tax-free and penalty-free if you do so by the due date of your return, which will generally be April 15 of the year following the taxable year.
If you obtain an extension for your taxes, then you have until your extended due date to withdraw those contributions tax- and penalty-free. If you contribute in excess of the maximum contribution, you must withdraw that excess contribution before your filing deadline, in order to avoid a penalty on the excess contributions.
In order to withdraw some or all of your contributions for the tax year, you cannot have already taken a deduction on the contribution and you must withdraw any interest or other income earned on that contribution. If your contribution experienced a loss, you may adjust your contribution, based on the amount of the loss.
General Withdrawal Rules for IRAs
In general, you may take a withdrawal from your IRA at any time. If you take a withdrawal before you are age 59 1/2, you will be subject to a 10 percent early withdrawal penalty. In addition, withdrawals from a traditional IRA will be included in your gross income.
Qualified withdrawals from a Roth IRA are not included in your gross income in the year of distribution. Qualified withdrawals from a Roth IRA are those made after 5 years beginning with the year you first make a contribution to your Roth IRA and the distribution is made after you reach age 59 1/2 or are disabled or the distribution is made to your beneficiary after your death or you meet a first home homebuyer exception.
Kay Lee began freelance writing for Answerbag and eHow in 2010. She is an attorney in Washington, DC, practicing since 2006. Lee specializes in employee benefits and executive compensation. She holds a Juris Doctor from the Columbus School of Law and a Master of Laws from Georgetown University Law Center.