Retirees who are taking required minimum distributions from their IRAs and 401(k)s well know the importance of making those withdrawals on time. If they miss a distribution, they'll not only owe any taxes that were due on that withdrawal, but they'll also owe a penalty equal to 50% of the amount they should have taken but didn't. Given the size of the penalty, and the fact that many retirees need every bit of income they can get, this isn't something you want to let happen.
Less frequently discussed but also important to keep on your radar is the 6% tax that's levied on what are called "excess contributions" to an IRA--the amount by which an IRA contribution exceeds the maximum allowable amount an individual was able to put in for that tax year.
Note that the penalty only applies to the amount by which your contribution exceeds the allowable threshold. The contribution limits for 2012 are $5,000 for individuals under 50 and $6,000 for those older than 50; the maximum contribution cannot exceed an individual's earned income amount for the year.)
Of course, the easiest way around the excess contribution penalty is to avoid it in the first place, by making sure your contribution amount and type is allowable at the time you make it. If you have any questions about your eligibility to contribute to a given account type, ask your tax or investment advisor.
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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