IRA » Individual Retirement Account

For years you have known not to touch the money in your 401k or IRA as substantial amounts of money would be lost in the shape of penalty fees and taxes. However, if the current turn of economic events is leaving you with no other option then to tap into the "forbidden zone" of your retirement assets, there are some steps you can take to help mitigate and lessen the damage you may cause by tapping into either your 401k or IRA for a pre-retirement withdrawal.

IRA penalty avoiding strategies vary. One option is instead of immediately retorting to withdrawing the money from an IRA, take a short term loan against the account. By ensuring that the amount withdrawn is either put back into the original IRA or invested into another traditional IRA the 10% penalty for early withdrawal will be avoided all together.IRAs can also be tapped into penalty free for specific reasons, such as qualified college costs, first time home purchasing or medical expenses, but this strategy does require that the money accessed is taxed as income for the year of the withdrawal.

If your spare money is invested into a 401k plan you need to take a different approach as different investment instruments have unique rules onto themselves. If you are working but need to access cash in your 401k fund then a loan against the account is your best move. That money must be paid back either over time if you are still an employee of the company that issued the fund or immediately if you are no longer working there.

Additionally 401ks can be tapped into for qualified hardship scenarios. According to the IRS:

"If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards."

The final way you may be able to tap into your 401k or IRA without incurring too much financial damage is by taking a substantially equal periodic payment. TheDenise Appleby's Retirement Dictionary reports that the 10% government penalty for early withdrawal can be avoided if an investor takes a series of distributions from a qualified plan.

Before taking advantage of any of these strategies, make sure to discuss your options with your tax preparer as they are the best person to provide you guidance for this difficult decision.

If you've contemplated the contribution limits for the traditional IRA and/or Roth IRA, you'll be happy to know thatthey're decently substantial. While your limit may not reach the level of the 401k or other investment options, it helps to give you a sizable nest egg if you start early - and take advantage of its full limit.

What is the Limit?

Whether you're looking to invest in the traditional IRA or the Roth IRA, the contribution limits are the same: $5,000. The annual limit is determined by the Federal government and can change from year-to-year; however, it doesn't drop.

The current guideline for limit adjustment is that it raisesbased on inflation by $500 each year. If there is no inflation to consider in a particular year then it doesn't raise. Such is the case for the years 2008 and 2009.

How to Manage IRA and Roth IRA Contribution Limits

What's interesting about making contributions to the traditional IRA or Roth IRA is that both allow you to make deposits throughout the year. So for instance, if you want to make monthly deposits of $416.17 per month, four deposits of $1,250, or one payment of $5,000, you can do it any of these ways. However, it's fairly common to take the monthly option - or even bi-weekly - because funds are often deducted from a paycheck.

Also, it's good to know that you're not required to reach the full limit available to you. However, there are two reasonsthat it's good to shoot for the stars when working with contribution limits. One is that you have greater tax advantages the more you deposit. Also, you don't get to "make up" the difference the following year. For instance, if you contributed $2,500 in 2008, you don't get to contribute $7,500 in 2009. If you don't move on it, you lose it. So if at all possible, it's good to maximize your contributions each year.

Now that you know the contribution limits for both the traditional IRA and Roth IRA, are you going to take advantage of them? In these difficult economic times, any effort to save your money is greatly beneficial. The more you save, the less you'll have to worry when you retire.

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