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By Joe Cicchinelli, IRA Technical Expert
The IRS limits how much you can contribute to an IRA annually. In 2015, the maximum annual IRA contribution you can make is $5,500 (or $6,500 if you are age 50 or older). You cannot contribute more than this dollar limit; if you do, you’ll have an excess IRA contribution, which will be subject to a 6% penalty if it’s not timely corrected. If you have a Roth IRA, the same limits apply. If you want to contribute to both an IRA and a Roth IRA for 2015, the combined limit is $5,500; you cannot contribute $5,500 each to an IRA and Roth IRA for the year.
There are no dollar limits on the amount of money you can rollover or transfer from one IRA to another IRA or from a company plan to an IRA. Also, there’s no dollar limit on the amount of money you can convert from your IRA to a Roth IRA.
That's the nuts and bolts, now here's the painful lesson one married couple learned about annual IRA contribution limits.
The couple sold their house and each deposited $200,000 of that money into their respective IRAs for the year. The deposit wasn’t a rollover because you’re not allowed to roll over the proceeds from the sale of your house to an IRA. You can only roll over funds from an IRA or a company retirement plan into your IRA. So, the $200,000 deposit was treated as an annual contribution, which is obviously much more than they were allowed to contribute for the year.
As a result, each $200,000 IRA contribution created an excess IRA contribution for the year. Their problems got even worse believe it or not. They didn’t correct the excess contribution by removing it with the earnings by October 15 of the following year, which meant that the IRS 6% penalty applied each year until it was removed. They argued with IRS to no avail. The issue wound up in court, where they represented themselves (which is always a bad idea), and told the court that they were unaware of the IRA contribution limits and of the taxes on excess contributions. Sorry, but that is not a defense and won’t get them out of the penalties.
The moral of the story: there are "limits" for a reason. Don't exceed them, and if you do, make sure to rectify the error or face heavy IRS penalties.