An IRA is an excellent way to save for retirement. If you are fortunate, your company might offer matching contributions as part of their retirement plan. If you do not have company benefits like a 401(k), you can open an IRA for your own retirement account or as a supplement to your company plan. What are the maximums allowed to open an IRA account?
Maximum Yearly Contributions for IRAs
The IRS places certain limits on IRA contributions that you can deposit in a single year. They are $6,000 per person if you are under the age of 50 and $7,000 if you are over the age of 50. If you are married, your spouse can also contribute an equal amount to a separate IRA account.
Amount to Open IRA
The IRS does not set any limits on how much you need to open an IRA, but individual banks and brokerage firms establish their own limits. Technically, you could open an IRA with $0, but few financial institutions will allow you to do this. Some institutions offer no minimum IRAs, but you should be sure to read the fine print because there is often a catch. Typically, institutions require a minimum of $1,000 to open an account.
Typically, you cannot open an IRA with more than the allowable maximum IRA contribution according to your age. There are exceptions. For instance, if you have a previous retirement account and you want to roll it over to a new IRA, then you can often open the new IRA with more than the allowable yearly contribution.
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Other IRA Options
The most common scenario is when someone is working for an employer. However, some circumstances can allow you to make larger contributions. One of these is if you are a business owner and have a Simplified Employee Pension (SEP-IRA). Under this plan, the employee does not make contributions. All the contributions come from the employer. The employer can contribute up to 25 percent of the employee’s salary up to $57,000.
Another way to make a larger contribution is to open a SIMPLE IRA. The SIMPLE IRA contribution allows up to $13,500 with a catch-up amount of $3,000 if you are over the age of 50. Workers over 50 can contribute up to $16,500 per year. This option is for sole proprietors.
Handling of Excess Contributions
Most banking institutions and brokerage firms will not allow you to exceed the maximum yearly contribution amount as an initial deposit. If you go over your yearly contribution amount, you might be required to reduce your contributions by that same amount the next year. If you do not, you could trigger a big tax penalty.
There are several ways to avoid a big tax penalty if you accidentally exceed your maximum allowable contributions. You could transfer the excess amount to another taxable IRA account. If you choose to do this, you could be charged a 10 percent early withdrawal penalty if you are under the age of 59 1/2.
You could also spread out the excess amount by reducing your contributions over the next several years. If you choose this option, you can incur a 6 percent penalty every year until the overage is corrected.
The IRS penalties for excess contributions are steep, which is why many institutions and brokerage firms have maximums set for opening an account. Several factors can affect the maximum you are allowed to begin an account. The IRS does not have any restrictions on the maximum amount for opening an account, but you will face stiff penalties if you exceed more than the maximum yearly contribution. If you have any questions about how these rules apply to you, you can contact your tax professional or your IRA provider.
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Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.