Restrictions on Funding an Individual Retirement Account


An Individual Retirement Account (IRA) is an excellent way for individual investors to save for retirement given the substantial tax advantaged benefits IRA accounts offer. With these benefits, however, come several restrictions that attempt to prevent investors from taking advantage of the program.

Unlike other investment accounts that can be funded with stocks, bonds, precious metals, or other assets an IRA account can only be funded with cash. Any other transfer into an IRA account is prohibited and will strip the account of its tax advantaged benefits. Any rollover or transfer between IRA accounts or between IRA and other types of retirement accounts is exempt from this rule as these accounts are made up of securities investments and prohibiting their transfer would be an unreasonable restriction on these types of accounts.

IRA accounts also have maximum yearly contribution limitations. Currently those limitations are $5,000 per investor per year for investors under age 50. Investors over 50 are permitted to make additional contributions (often called “catch up” contributions) in excess of $5,000 per year (currently capped at $6,000 per year). These limitations hold across all types of IRA plans meaning that the total contribution per year for Roth, traditional, or a combination of Roth and traditional IRA plans cannot exceed $5,000.

Roth IRA plans are subject to additional funding restrictions depending on the investor’s income. Account holders filing as single on their tax return can make a maximum of $120,000 per year to qualify for investment into a Roth IRA while those who are married and filing jointly can make a maximum of $177,000. Traditional IRAs are not subject to these income restrictions.

Of these funding restrictions, the one that investors must pay the most attention to is the restriction on maximum contributions per taxable year. This restriction must be monitored by the investor and can become fairly complicated when he or she has multiple IRA accounts across different banks or brokerages. What makes this especially important is that any amounts invested in an IRA account above the maximum will be taxed and penalties potentially levied by the Internal Revenue Service when the overages are discovered.

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